The moderating role of risk-taking between CEO compensation and firm performance: evidence from financial sector of Pakistan

Although the trend of pay for performance has been increased since last few years but still it is a controversial argument if CEO compensation actually increase the firm performance. It is also argued by prior studies that performance based CEO compensation increase the potential risk of the firm which could further effect the long-term firm negatively. This study attempts to illustrate the impact of CEO compensation on firm performance (operating and market performance) along with the moderating role of risk-taking among these variables. The total 66 financial firms and banks listed on Karachi Stock Exchange has been included under the investigation from the year 2010 to 2014. In addition, Hierarchical linear regression has been employed to analyze the results though the assumption were precisely fulfilled. The results shows the significant negative impact of CEO compensation on operating performance which could be due to the high managerial power, cronyism, rent extraction or weak corporate governance. Nevertheless, the study revealed significant positive impact of CEO compensation on market performance but solely this determinant can be relied as a strong predictor of market performance due to lesser effect size of the model. Therefore, it is suggested that futuristic studies in this context should include different other control variables (corporate governance mechanisms, economic variables etc.) to improve the model’s goodness of fit. Additionally, this study does not find any moderating role of risk-taking between CEO compensation and firm performance (both operating and market