Arifin, Taufiq and Sutopo, Bambang and Trinugroho, Irwan (2012) DO INDONESIAN FIRMS PAY THEIR EXECUTIVES BASED ON PERFORMANCE? .

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    In the first year of this research project, we have done two empirical studies. In the first paper (Chapter II), we examine the pay-for-performance hypothesis, firms compensate their executives based on performance, by studying Indonesian firms during the global financial crisis. Controlling for some firm fundamental factors and industry factor, we find that there is strong evidence that past performance drives the compensation paid to executives. This paper also reveals that financial firms tend to compensate their executive higher than those of non-financial firms. Pay-for-performance system might reduce the agency problem between managers and shareholders, on the other side; however, this system might also reinforce the incentive for managers to take risk which subsequently increases the degree of riskiness of firms. In the second year, we investigate the impact of executive compensation on bank performance and risk taking behavior using data for Indonesian commercial banks. Our findings confirm that executive compensation could lead to a higher performance. We also conclude that, at least in context of Indonesian banking, a higher executive compensation does not bring to a higher risk taking behavior. We argue that the banking oligopoly in Indonesia create less incentive for managers to invest in risky projects as they “enjoy” the higher interest rate on loans even in less risky loans.

    Item Type: Article
    Subjects: H Social Sciences > HB Economic Theory
    Divisions: Fakultas Ekonomi
    Depositing User: Lynda Rahmawati
    Date Deposited: 14 Apr 2014 23:18
    Last Modified: 14 Apr 2014 23:18

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