The Determinants of Board Compensations: Evidence from Indonesia

SALIM DARMADI

Abstract


This paper examines the determinants of board compensation in a developing economy that adopts a twotier board structure system. Corporate governance structure, firm-specific characteristics, and firm performance are hypothesized as significant determinants. The sample consists of 442 firm-year observations, comprising 255 listed firms on the Indonesian Stock Exchange (IDX) in the financial years 2006 and 2007. I provide empirical evidence that profitability, firm size, and the number of board members are positively associated with the compensation level. Family-controlled firms are found to spend a higher proportion of their financial resources on compensating their board members, leading to a higher probability of agency problems in such firms. Further, this study investigates pay-performance sensitivity and reveals that changes in firm value are positively associated with changes in board compensation.

Keywords


Board compensation; corporate governance; Indonesia; pay-performance sensitivity; two-tier board

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ISSN 2086-6887 (Print)
ISSN 2655 - 1748 (online)

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