Remuneration committees, executive remuneration, and firm performance in Indonesia

Iman Harymawan; Dian Agustia; Mohammad Nasih; Azmi Inayati; John Nowland

doi:10.1016/j.heliyon.2020.e03452

Remuneration committees, executive remuneration, and firm performance in Indonesia

Heliyon. 2020 Feb 21;6(2):e03452. doi: 10.1016/j.heliyon.2020.e03452. eCollection 2020 Feb.

Authors

Iman Harymawan¹, Dian Agustia¹, Mohammad Nasih¹, Azmi Inayati¹, John Nowland²

Affiliations

¹ Universitas Airlangga, Jalan Airlangga 4-6, Gubeng, Surabaya 60115, Indonesia.
² Illinois State University, 100 N University St, Normal, IL 61761, United States.

Abstract

Indonesia is currently in the process of mandating the establishment of Remuneration Committees (RCs) for all listed companies. However, little is known about the effectiveness of RCs in Indonesia. This study sheds light on this issue, by examining the relationships between RCs, executive and board of director remuneration, and firm performance in Indonesia. This study uses 847 observations of firms listed on the Indonesian Stock Exchange (IDX) during 2014-2017. Our results indicate that RCs are positively related to executives remuneration and firm performance. In particular, higher remuneration is only linked to higher performance in firms that have established a remuneration committee. This study documents the interactions between RCs, remuneration levels of senior company officers and firm performance in an emerging market setting with voluntary formation of RCs. This study has implications for regulators and company management in Indonesia (and other emerging markets), as the existence of remuneration committees is found to be associated with more effective remuneration packages and higher firm performance.

Keywords: Business; Firm performance; Remuneration; Remuneration committee.