DIRECTOR PAY AND FIRM PERFORMANCE IN SINGAPORE

Abstract

Studies conducted thus far have produced mixed results regarding the relationship between pay and performance and between pay and managerial power. Most of these studies have been concentrated in the United States and tend to focus on the chief executive officer. Similar studies in the Asian context or focusing on executive directors have been relatively scarce. Therefore, this study intends to look at executive director pay in the Singapore context by using a sample of 324 public listed companies in Singapore. Specifically, the study examines which of the two theories among principal-agent theory and managerial power theory, is relevant in the setting of the variable component of executive director pay in Singapore. The application of the two theories are examined by whether variable pay of executive directors increases with (1) increasing firm performance characterized by return on equity and Tobin’s Q (2) increasing managerial power characterized by chairman independence and board independence. The study shows that there is a positive relationship between the variable component of executive director pay and performance indicating that the principal-agent theory is applicable. On the other hand, there is not sufficient evidence to support the managerial power theory view on its own. However, on further analysis the study showed that the managerial power theory amplifies the effect that performance measures have on the variable component of executive director pay such that for a given level of performance, variable component of executive director pay was higher for increased managerial power.