Co-integrating relation between pay, board governance and performance: evidence from Indian banking

Abstract

Purpose

The purpose of the paper is to explore the long-run impact of board governance and bank performance on executive remuneration. More specifically, the study addresses two objectives. First, the authors investigate the long-run relationship between pay and performance hold for the Indian banking industry. Second, the authors explore the moderating role of the board in explaining the relationship between executive pay and performance.

Design/methodology/approach

The study uses multivariate panel co-integration approaches, i.e. fully modified and dynamic ordinary least square, to explain the co-integrating relationship between executive pay, governance and performance of Indian banks. The analysis is conducted for the period from 2005 to 2018.

Findings

The results of co-integration tests reveal a long-run relationship between executive pay, board governance and bank performance. The long-run estimates produce evidence in favour of the dynamic agency theory, suggesting that the implications of asymmetric information can be mitigated by associating the current executive pay with the bank performance in the previous periods. The finding of this study reveals that improvements in the board quality serve as a monitoring tool to constrain excessive pay and moderate the executives’ pay. Furthermore, the interaction of performance and board governance negatively impacts pay, supporting a substitution approach. It implies that setting optimal pay packages for executives necessitates enhanced and efficient board governance practices.

Practical implications

The study recommends significant policy implications for regulators and the board of directors that executive pay significantly responds to the bank’s performance and good board governance practices in the long run.

Originality/value

This paper provides novel evidence of long-run pay-performance-governance relation using a panel co-integration approach.

Citation

Bhatia, M. and Gulati, R. (2024), "Co-integrating relation between pay, board governance and performance: evidence from Indian banking", Corporate Governance, Vol. 24 No. 1, pp. 41-58. https://doi.org/10.1108/CG-11-2021-0401