Directors' Compensation Determinants and Their Linkages to Bank Performance: Selected Asian Emerging Countries

As financial institutions that mobilized customers’ deposits for higher returns, banks constantly in search of good leadership talents to be their directors. Directors with wide experience are highly required to manage banking institutions effectively to achieve good corporate performance. Hence, these directors’ leadership and managerial talents need to be attractively compensated especially in the highly competitive banking industry. The main objectives of this study are; to identity significant factors determining Board of Director (BOD) compensation and to establish the linkage between BOD compensation determinants and bank performance using data from 65 banks from 5 Asian emerging countries namely Malaysia, Thailand, Indonesia, Philippines and India. The factors are total asset, age, number of employee, pretax income, net income, operating expenses, insider, outsider, tenure, education, experience, inflation, BOP and GDP. We employ multiple regression analysis to identify the determinants of BOD compensation and Structural Equation Modeling for path analysis. The addition of macroeconomic variables as BOD determinants and the path analysis extend two new dimensions from past studies on BOD compensations. Our finding shows that bank size (total asset) is the most significant determinant and it is positively related to BOD compensation for banks in the five sample countries excluding banks in India. The impact of inflation, BOP and GDP are new findings since they have not been tested before on BOD compensation studies across emerging Asian countries . SEM on the other hand, analyzed 3 exogenous variables namely bank specifics (pretax income, net income, operating expenses, total assets, firm age and employee), BOD characteristics (experience, insider director, outsider director, tenure and education) and economic factors (inflation, BOP and GDP); and 2 endogenous variables namely BOD compensation (total compensation) and bank performance (Return on Equity). The study shows experience and GDP have direct path and significant relationship with BOD compensation and bank performance. However, experience shows an indirect path to bank performance through BOD compensation. Meanwhile, GDP is positively related to BOD compensation and bank performance. BOD compensation is positivity and significantly related to bank performance. This study is significant since it would probably be one of the earliest studies which utilize SEM to show the relationship between internal and external factors that influence BOD compensation and the linkage between BOD compensation to bank performance. The findings from SEM provide contribution to new knowledge in terms of the direct and indirect effects of the determinants on BOD compensation and bank performance. In conclusion, the study provides support to the application of Expectation theory, Equity theory and Stewardship theory in the context of BOD compensation determinants in the 5 Asian countries