DETERMINANTS OF DIRECTOR COMPENSATION: A STUDY OF DIRECTOR COMPENSATION IN AUSTRALIA

Abstract

In this study, the determinants of director compensation for firms registered and headquartered in Australia as well as whose primary listing is on the Australian Stock Exchange are investigated. People behave the way they are incentivized to. As such, in order to understand director actions and what motivates directors, it is important to know the determinants of director compensation. Companies registered in Australia were chosen due to the level of disclosure required by the Australian companies act. The requirement for the firms to be headquartered in Australia too was to ensure a level of homogeneity in the companies studied. The model proposed has an r-square value of about 74.9% and it has been determined that the factor that most consistently positively correlates to director compensation for the firms studied is firm size. Also, it was determined that director compensation is consistently not positively correlated to shareholder returns. Lastly, a positive correlation between director compensation for the year and CEO compensation for the year was observed even after controlling for firm size, firm governance indicators and firm profitability. These results indicate that director compensation for firms registered and headquartered in Australia and listed on the Australian Stock Exchange may not be structured to sufficiently mitigate the agency problem inherent in modern corporations. This should be a cause for concern for shareholders and regulators.