Directors' remuneration: various issues relating to firm performance.

Ghosh, Ayan ; Aggarwal, Rashmi

1. INTRODUCTION

Of late, there has been plenty of discussions on the remuneration of CEOs in the media. After the financial crisis, Vikram Pandit opting for $1 salary and more recently SKS Microfinance CEO was taking home exorbitant salary despite the company being in poor health drew attention of the media. In the same context, Business standard reported that the pay-package of CEO of Bharti Enterprise was supposed to be increased two and a half times, as suggested by their human resource committee for his reappointment. But, the same has been subsequently postponed. These anecdotes give us the motivation to dwell upon several aspects of the director's remuneration like, factors affecting the director's remuneration, how the remuneration is decided and the governance parameters regarding the same.

Does pay dispersion have a positive or negative effect on work performance? The literature does not provide a clear answer. There are two schools of thought: One says that dispersion of remuneration has a negative impact on team cooperation and firm's performance may be adversely affected (Milgrom and Roberts 1988; Akerlof and Yellen 1990; Lazear 1989). This is because employees may experience feelings of relative deprivation if wages are unequal (Martin 1981). Employers have to use narrow wage differentials to reduce dissonance among employees and favour team cohesiveness (Levine 1991). Other school of thought says that larger intra-firm pay dispersion can motivate employees around the bottom of the pay distribution scale to work harder for the future reward of a higher salary (Lazear and Rosen 1981). Pay dispersion may also be beneficial for attracting and keeping talent (Milgrom and Roberts 1992) or for avoiding the loss of workers who are crucial to the firm's output (Ramaswamy and Rowthorn 1991).

The empirical evidence on this issue is mixed and therefore inconclusive. Some studies support the idea that pay dispersion has a beneficial effect on team performance (Becker andHuselid 1992;

Ehrenberg and Bognanno 1990; Marchand, Smeeding, and Torrey, 2006); other studies show that pay dispersion has a detrimental effect (Bloom 1999; Depken 2000; Wiseman and Chatterjee 2003; Jane 2010); A few studies find no significant effect (Berri and Jewell 2004; Avrutin and Sommers 2007;

Katayama and Nuch 2011). In sum, the available evidence does not appear to be very conclusive yet (Frick et al, 2003).

One of the possible reasons for such disparity in result may be lack of appropriate data. Most of these studies relied on economy-wide inequality indicators or used 'noisy proxies' of firm performance. Moreover, they are generally restricted to a specific segment of the labour force (e.g. the top management level) or a particular sector of the economy (e.g. the manufacturing sector, academic departments, and professional team sports). Classical economic theory argues that wage will be governed by growth of population. But that is with regard to unskilled job of that time. Subsequent Neoclassical Theory develops the marginal productivity theory, which argues that wage will be linked to value of marginal productivity of a worker. But this cannot explain wage dispersion among firms in the same industry and also presence of very high wage and salaries in various firms. Explanation of this high wages and salaries leads to the development of Efficiency wage theory. But still it is difficult to explain high salaries of Directors and CEOs.

Hart and Holstrom (2002) had analyzed four situations involving risk, reward, and asymmetric information. They found that a fundamental dilemma exists between providing incentives and avoiding risk. Perfect incentives can only be provided at a major cost of risk, and a complete avoidance of risk leaves us with no incentives. The cases further illustrate that if there is a significant and positive correlation between the manager's effort and the profit of the firm, it is a good idea to make the salary of the manager an increasing function of the firm's profit.

In the present work, the paper will focus on Indian companies as there are relatively very few works on the emerging economies and more specifically India in this area. The paper looks into the executive pay structure of the Indian companies. It intends to study the relationship between the directors' remuneration and the firm's performance and whether there is any significant relationship between the two. In order to analyze the same, we have taken a pooled data-set of twenty-five companies and their financial data for six financial years. Then, we studied the causality of the profitability of the firm. For that, we have taken two independent variables, Sales turnover and directors' remuneration and run a pooled regression analysis. Based on the result, further relationship between the profitability of the firm and directors' remuneration is studied.

The paper is organized as mentioned hereafter. In the next section, we study the literature, trying to understand various parameters like the factors affecting the pay, components of the pay, present trends, various theories on agency-cost and management. Then methodology and various variables used and the hypothesis are discussed. In the last section, the results and conclusion are discussed in addition to the discussion on scope of further research.

2. LITERATURE REVIEW

2.1. Factors affecting the director's remuneration

Murphy (1999) states that pay levels vary with industry; rate of increase of compensation is also different in different industries. If compensation payments are phased rather than paid as a lump sum and cease when the director finds a new job, then "mitigation becomes automatic". He further goes on to report that the firm size is also an important parameter in deciding the pay. The ownership structure of the company also impacts the pay scale. A PSU and a private organization have a different pay and compensation structure.

A cross-border comparison study is difficult as stated by Murphy (1999) due to substantial heterogeneity in available data, regression specifications and institutional details like tax rates, restrictions on insider trading, etc.

2.2. Components of director's pay

According to the Greenbury (Greenbury, 1995) report, three elements within the executive remuneration package are of paramount importance. These are: (1) the size of basic pay increases; (2) the large gains from share options, particularly in the recently privatized energy and water utilities; and (3) the compensation payments to directors on loss of office. (Hughes, 1996). Bryan et al (2000) considers four outside director compensation components: cash compensation, stock option awards, stock grants, and pension plans.

In addition, firms often provide outside directors with pension plans for a certain number of years after retirement. Pension benefits usually are determined by the number of years of service to the firm. If director's tenure is positively related to the quality of that service, then director pension benefits reflect performance as well. The lack of consideration for the relation between director compensation (both cash and stock-based) and director pension benefits can cause a measurement problem if pensions represent a form of (deferred) compensation.

2.3. Director's remuneration and Corporate Governance

Shleifer and Vishny (1997) state that governance is a means to make sure that managers' activity concentrates on value maximization of the firm. There are several mechanisms like management ownership, corporate control activities, shareholder activism and trading activities. Dwivedi and Jain (2005) opine: "Governance parameters include board size, director's shareholding, institutional and foreign shareholding, while the fragmentation in shareholding is captured by public shareholding."

In the Indian context, the remuneration of the nonexecutive directors will be decided by the board of directors. The disclosure should include all elements of the director's remuneration, details of the fixed component and performance-linked incentives, along with the performance criterion. It should also declare the service contracts, notice period, severance fees and also any stock option details.

The board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company's policy on specific remuneration packages for executive directors including pension rights and any compensation payment. In order to avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors should comprise at least three directors, all of whom should be nonexecutive directors, the chairman of committee being an independent director.

For better governance, all pecuniary relationship or transactions of the non-executive directors vis-avis the company shall be disclosed in the Annual Report. Further the following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the Annual Report:

a. All elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc.

b. Details of fixed component and performance linked incentives, along with the performance criteria.

c. Service contracts, notice period, severance fees.

d. Stock option details, if any--and whether issued at a discount as well as the period over which accrued and over which exercisable.

The company shall publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the company's website and reference drawn thereto in the annual report. The company shall disclose the number of shares and convertible instruments held by non-executive directors in the annual report.

Non-executive directors shall be required to disclose their shareholding (both own or held by/for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director.

All the members of the remuneration committee should be present at the meeting. And, the Chairman of the remuneration committee should be present at the Annual General Meeting, to answer the shareholder queries. However, it would be up to the Chairman to decide who should answer the queries.

2.4. Recent trends in director's remuneration

According to a Hewitt Associates analysis report the components of a outside director remuneration are described below: Distribution of Outside Director Compensation Outright Stock 7% Deferred Stock 9% Restricted Stock 17% Stock Options 10% Committee Fees 10% Board Meeting Fees 5% Board Retainer 42% Note: Table made from pie chart.

The report also mentions that 99% of companies provide an annual retainer and 79% are distributed solely in cash, 2% solely in equity and 18% of retainers include a mix of cash and equity. The average annual retainer is $67,262 and the median is $50,000. As for the board meetings and fees, 56% of companies pay board meeting fees. The average fee is $1,094 and the median is $1,000 per meeting. The boards studied met on average 8 times during the study period. It also reported that 83% of companies provide some form of non-retainer equity compensation. The median and average economic values (fair market on 3/31/09) of non-retainer equity grants are $59,172 and $68,767, respectively.

Watson Wyatt Data Services' 08/09 Survey on Board of Director Compensation reflects the practices of 735 boards, including 510 that are "matched" (to previous year data). It reported that 68% of responding organizations increased outside director compensation in 2008. Across all matched organizations, meeting fees rose 7% (although, notably, among just those organizations that raised meeting fees, the average increase was 90% reflecting the fact that meeting fees, when they are adjusted, tend to move in sizeable increments).

Several reasons which are causing the fees of the directors to rise are the shrinking pool of quality independent director as well as the increasing demand for expertise and restrictions on the number of directorships that individuals may hold.

2.5. Relation between pay and performance

2.5.1. Introduction

There have been various studies on the impact of the executive compensation on firm's performance. The rising gap between the salary of the CEO and other employees has drawn attention of a number of researchers. It has been found that higher CEO pay which is not related to corporate performance indicates corporate governance problems in the firm. The relation between corporate governance and executive pay can be attributed to Agency theory (Fama and Jensen, 1983).

2.5.2. Principal-Agent theory and Executive Remuneration

Ross in his paper (1976) propounded the idea of Principal Agent Theory and then Meckling and Jensen extended the idea of principal-agent in corporate finance in order to open up the black box of finance of the firm. It analyzed the conflicts of interest between involved human beings and the resulting human behaviour of the organizations.

Agency theory postulates that because people are, in the end, self-interested they will have conflicts of interests over at least some issues any time they attempt to engage in cooperative endeavours. This cooperation includes not only commerce through partnerships, and corporations, but also interaction in families and other social organizations. The conflicts are so ubiquitous and so familiar that they almost become invisible. As conflicts of interest cause problems, losses to the parties involved makes the parties themselves minimize the agency costs of such cooperation. This conservation of value principle is the basic force that motivates both principal and agent, or partners, to minimize the sum of the costs of writing and enforcing (implicit and explicit) contracts through monitoring and bonding, This incurs a residual loss because it will not pay to enforce all contracts perfectly. One source of agency costs emanates from the conflicts of interest between people.

Executive compensation is another type of internal control mechanism proposed to achieve alignment of interested between manager sand shareholders. According to Dennis (2001), two overriding issues of executive compensation focus level of executive pay and the sensitivity of pay to performance. It is believed that the higher the pay, the less likely is the manager to risk losing his job.

There are several conclusion drawn by Murphy (1999) as well as Core, Guay, and Larcker (2003). They are (1) the sensitivity of executive compensation to firm performance has increased over time; (2) much of this sensitivity comes through executive ownership of common stock and options on common stock; and (3) stock options are fastest growing components of CEO compensation and equity ownership.

Perry (2000) has shown that incentive compensation for director has had a good impact on the functionality of the directors. For example, when directors of independent boards receive incentive compensation, they replace the CEO more often following poor performance. Another study by Cordeiro. Veliyath, and Neubaum (2005) examine the relation between stock options and company performance. The study found that there is a positive correlation between the two.

2.5.3. Tournament Theory and executive wage dispersion

The gap between CEO salary and that of the next level below is typically very large (Gomez-Mejia, 1994). Conventional neoclassical explanations relying on marginal product do not offer a convincing explanation for such a disparity (O'Reilly et al., 1988). Lazear and Rosen (1981) propose that this disparity can be explained via tournament theory according to which contestants in labour market are paid prizes that depend on the rank order of the contestants. Lazear and Rosen (1981) suggest that those vying for the position of CEO could be viewed as competing in a tournament, where prizes are fixed in advance and tournament participants expend effort to increase the likelihood of winning a prize where what matters is not the absolute level of performance, but how well one does in relation to other competitors (Conyon et al., 2001). Rosen (1986) argues that top prizes of a disproportionate size are theoretically necessary to motivate tournament survivors so that they do not rest on past achievements as they enter the final contest. The use of contests in the design of remuneration packages is particularly attractive when monitoring costs are substantial. In sum, tournament theory predicts first, a convex relationship between executive remuneration and organizational level; second, prize (gap in remuneration) and number of contestants are positively correlated, [support from western companies and also from China (Kato and Long, 2008]; Lin and Lu, 2009); and third, corporate performance is positively correlated with executive wage dispersion (O'Reilly et al., 1988; Lambert et al., 1993; Eriksson, 1999).

In the context of executive pay, tournament theory has three propositions: 1. the relationship between executive remuneration and organizational level is convex; 2. the pay gap between High performance executives and the average executive team increases with the number of contestants; and 3. firm performance is positively related to executive pay gap.

First, the pay difference between the highest paid executive and the second highest paid executive is bigger than the pay difference between the second highest paid executive and the third highest paid executive, and the difference between the two is just big enough to be a convex relationship. Moreover, higher state ownership reduces the pay difference between different levels. The pay gap between Chinese companies is much smaller than that reported between western companies. In the study of Chen and Cai, 2010, director's remuneration increases by around 20% when the director is promoted from level 2 to level 1, compared to 60% in the UK and 140% in the USA (Main et al., 1993; Conyon et al., 2001). Second, the relationship between the director's pay gap and the number of contestants is weak; higher state ownership further weakens the relationship. Third, corporate performance is positively related to the director's pay gap, especially in less government-controlled companies.

It has also been observed that the firm's performance is positively associated with executive pay dispersion (Main, O'Reilly, and Wade, 1993) and the CEO pay rises with the number of vice presidents competing for the top position (Bognanno, 2001).

2.5.4. Incentive Compensation for Board of Directors

The incentive compensation was started by GE in 1989, when they had their non-executive director's pay directly tied up with their share-holder's fortunes. And, this process gained popularity right through the nineties and the present decade. Director's incentive compensation would mean the use of stocks, stock options, and other equity-based compensation as a integral part of the director's compensation package. Providing financial incentives can encourage desirable behaviour such as active monitoring of managerial decisions.

Jensen (1993) says that "the main advantage of monetary incentives in this mosaic of organizational incentives is that general purchasing power is valued by almost everyone (because it is a claim on all resources), and it can be easily varied with performance". On the other hand, he also says that monetary incentives are not the best way to motivate every action because monetary incentives are so strong, and because it is sometimes difficult to specify the proper performance measure, monetary incentives are often dominated by other approaches.

Director's pay contains incentives if the incentive is strongly linked to firm performance and also there is a sufficient penalty for poor performance. Hoi and Robin (2007) argue that the penalty is a key element in the plan. Jensen and others argue that the director's personal wealth should be put at stake to design and effective compensation package.

2.5.5. Equity Fairness Theory and the relation between firm's performance and management compensation

Lee, Lev and Yeo (2005) has found that the firm's performance measured by Tobin's Q ratio or stock performance is positively associated with dispersion of management compensation. They go on to document positive association between firm performance and pay dispersion to be stronger in firms with high agency costs related to managerial discretion. Furthermore, effective corporate governance, especially high board independence, strengthens the positive association between firm performance and pay dispersion.

Rost and Osterloh (2009) further investigated the relationship between variable executive pay and firm performance by using meta-analysis and found that CEO income contributes very little to the increase in firm's performance, and that CEO pay and firm performance are not linked.

2.6. Directors' compensation and firm performance

There has been works on pay-performance previously which have established several tenets like: (a) there is a positive relation between CEO compensation and firm performance (Hall and Liebman, 1998; Mehran, 1995). (b) There is an inverse relationship between pay-performance sensitivity and market value of the firms (Schaefer, 1998). (c) The firms which have significant and positive relationship between CEO compensation and firm performance will give higher returns to the share holders than those companies which have less sensitive relation between CEO compensation and firm performance (Mehran 1995). (d) The composition of the compensation package of the executives is also equally important as the level of compensation for the firm performance and this can be paid directly (via bonus/commission) or indirectly (via stock option) (Masson, 1971). (e) A common argument against stock option is that it is easier to hype stock price over a short period than to build a long-term value. Options are inherently speculative and they can be exercised into cash when the share price is attractive. Option is just another form of currency and not highly sensitive to performance as measured by changes in market value of equity (Paul, 1992; Sloan, 1993).

Ghosh (2003) also found that there is a significant effect of the compensation of the board as well as of the CEO on the performance of the firm. There is a non-linear positive relation between pay and performance of the firm. Pay-performance sensitivity is high for smaller firms than the larger firms. He cited that there is scope to improve the performance for the small firms than the large firms. There is a threshold point at Rs.11 Cr. beyond which the performance starts falling. For lower level of compensation CEO and other directors work in favour of firm. As the compensation increases CEO as well as other executive directors become reluctant to work hard and as a result firm performance falls. He adds that the performance is more sensitive to the compensation of the CEO than the compensation of the entire board.

3. EMPIRICAL ANALYSIS

3.1. Research hypothesis

The paper deals with the impact of the directors' remuneration on the performance of the company, measured by the impact of directors' compensation on the intrinsic and extrinsic value it adds to the firm. Thus our basic model is Firm's performance = f (Directors' remuneration). Definitions of financial performance measures are quite standardised and used widely to study firm performance. It is also easy to obtain as public limited companies have to publicly disclose their financial results to fulfil regulatory requirements. The firm's performance is measured using several parameters like Return on assets, Stock price movement, profit after tax, Earnings per share, etc.

The use of incentive or performance-linked pay, as a tool to motivate managers and induce risk taking, has been widely recognised in the economic literature. An employment contract that contains provisions for incentive pay will result in managers being paid higher amounts of variable pay on achieving higher levels of profitability. Paying incentive pay in the current period can also be seen as a tool for motivating managers to achieve superior performance in subsequent periods. Therefore, the two propositions above give rise to the first set of hypotheses tested in this paper.

Hypothesis 1: Ceteris paribus, Profit after tax and Directors' remuneration of a firm will not have a significant relationship.

Hypothesis 2: Ceteris paribus, Profit after tax and Sales Turnover of a firm will not have a significant relationship.

If there exist any significant relationship between Profit after Tax and Directors' remuneration, then, a subsequent Hypothesis.

Hypothesis 3: Ceteris paribus, Profit after tax and Directors' remuneration of a firm will have a positive correlation.

3.2. The data

The primary source of the data comes from the Prowess, the corporate database of the Centre for Monitoring of the Indian Economy (CMIE). Since this is a cross sectional study of executive compensation the compensation data and other independent/control variables covers a single time period: we use the last complete financial year for each company. Most Indian companies have their financial years running from the April 1 to the March 31 of the following year.

A cross sectional study like this one needs a fairly large data set to establish the correlations between the various parameters put forth in the model. Similarly for the pooled regression we need a large dataset which is populated by pooling seven years financial data of twenty-five companies. The data in the sample must also capture the variations in the values of the independent variables and should also consist of firms for which data on CEO compensation, financial results and other firm characteristics needed by the regression model are easily available. Hence, the data set will be limited to the universe of public limited companies that are traded on stock exchanges. The sample companies were chosen such that both PSUs and Private companies were covered.

All the performance-linked components of the CEO's compensation are assumed to be variable pay. Common names used by companies for variable pay include performance-linked payment, bonus, commission on profits, etc.

3.3. Result and discussion

The result of the regression analysis is shown in table 1. The table provides Regression analysis snapshot at 95% significance level. The dependent variable is Profit after Tax, as a measurement parameter of performance and the two independent variables are Directors' remuneration and Sales Turnover.

The minimum ratio of valid cases to independent variables for multiple regression is 5 to 1. With 154 valid cases and 2 independent variables, the ratio for this analysis is 77 to 1, which satisfies the minimum requirement. In addition, the ratio of 77 to 1 satisfies the preferred ratio of 15 to 1.

The probability of the F statistic (3.077) for the overall regression relationship is 0.0489, less than the level of significance of 0.05. We reject the null hypothesis that there is no relationship between the set of independent variables and the dependent variable ([R.sup.2] = 0). We support the research hypothesis that there is a statistically significant relationship between the set of independent variables and the dependent variable.

The Multiple R value is 0.198 and R squared value is 0.039, which signifies weak relationship. The independent variable, Sales Turnover has a probability of the t-statistic (2.4809) at a p-value of 0.014 which is less than the level of significance, i.e., 0.05. We reject the null hypothesis that the slope associated with Sales Turnover is not significantly related to Profit after Tax. The other independent variable, Directors' remuneration has the probability of the t-statistic (-0.8288) at a p-value of 0.4 which is greater than the level of significance, i.e., 0.05. We accept the null hypothesis that the slope associated with Directors' remuneration is not significantly related to Profit after Tax. The b coefficient associated with Sales Turnover (0.08927) is positive, indicating a direct relationship. The b coefficient associated with Directors' remuneration (-0.0000076) is negative, indicating an inverse relationship, but being insignificant, is not meaningful. Thus our research analysis fails to get any statistically significant positive relation between directors' remuneration and profitability of the company. The statistical analysis is rudimentary but it throws some light on this controversial issues in the Indian context.

4. CONCLUSION

The paper studies various research papers and literature on corporate governance, directors' remuneration and their relation to the firm's performance. As mentioned previously, there have been studies on various aspects like composition of compensation package, impact of stock option, etc. It was observed that most of the studies were done outside India, and also very studies were done in emerging markets barring a few on Chinese (Chen and Cai, 2010) and Malaysian firms (Abdullah, 2006). This paper focussed on studying the effectiveness of the boards and whether the huge remuneration given to the board of directors made any difference to the performance of the firm. It studied the impact of the increased remuneration on the value of the firm. The study focussed on the relationship between the profitability of the firm and two factors, one showing managerial aspect and another operational aspect.

The study showed that the firm's performance measured in terms of absolute terms like profit after tax had a significant relationship with the sales turnover but directors' remuneration does not have any significant relationship with the profitability of the firm. The survey of various literatures had shown results on both the lines: Some research showing positive impact and others no or negative impact.

This paper therefore adds to the limited empirical literature available on the impact of executive compensation in Indian firms. The few studies that exist [Ghosh 2003; Parthasarathy et al, 2006] have their own limitations like narrowly focussed data, etc. The present paper covers data from a well-diversified set of companies having wide range of market capitalization, from different sectors, etc.

5. SCOPE FOR FURTHER RESEARCH

The present study can be further refined by study with a larger set of data. Segregating the companies based on certain parameters like, market capitalization or sales turnover and then studying the impact of directors' remuneration and profitability would also make the research more illuminating.

REFERENCES

Abdullah, S.N. 2006, "Directors' remuneration, firm's performance and corporate governance in Malaysia among distressed companies", Corporate Governance, 6, 162-174.

Akerlof, G., and J. Yellen 1990, "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, 105(2), 255-283

Avrutin, B.M., and P.M. Sommers 2007, "Work Incentives and Salary Distributions in Major League Baseball," Atlantic Economic Journal, 35(4), 509-510.

Becker, B.E., and M.A. Huselid 1992, "The Incentive Effects of Tournament Compensation Systems," Administrative Science Quarterly, 37(2), 336-350.

Berri, D.J., and T.R. Jewell 2004, "Pay Inequality and Firm Performance: Professional Basketball's Natural Experiment," Atlantic Economic Journal, 32(2), 130-139.

Bloom, M. 1999, "The Performance Effects of Pay Dispersion on Individuals and Organizations," Academy of Management Journal, 42(1), 25-40.

Bognanno, M. L. 2001, Corporate tournaments. Journal of Labor Economics, 19,290-315.

Brennan, Michael J., 1994,'Tncentives, Rationality, and Society," Journal of Applied Corporate Finance, 7 (summer), 31-39.

Bryan S, Hwang L, Lilien S. 2000, CEO Stock-based compensation: an empirical analysis of incentive-intensity, relative mix, and economic determinants. J. 5wj.73(4):66-93

Cadbury, S.A. 1992, Report of the Committee on the Financial Aspects of Corporate Governance, The Committee and Gee Publishing, London,.

Chen, J. Ezzamel, M., and Cai, Z. 2011, Managerial power theory, tournament theory and executive pay in China. Journal of Corporate Finance. 4:1176-1199.

Cordeiro, J.J.., Veliyath, R., and Neubaum, D. 2005. Incentives for monitors: Director stock-based compensation and firm performance. Journal of Applied Business Research, 21,81-90.

Conyon, M. J., Peck, S. I. and Sadler, G. V. 2001 Corporate tournaments and executive compensation: Evidence from the U.K. Strategic Management Journal, 22,805-15.

Core, J.E., Guay, W.R., & Larcker, D.F. 2003 Executive equity compensation and incentives: A survey. Economic Policy Review, 9(1), 27-50

Denis D.K. 2001. Twenty-five years of corporate governance research ... and counting. Review of financial economics, 10(3), 191-212.

Depken, CA. 2000, "Pay Disparity and Team Productivity: Evidence from Major League Baseball," Economics Letters, 67,87-92.

Dwivedi, N. and. Jain A.K, 2005. "Corporate governance and performance of Indian firms: The effect of board size and ownership". Employee Responsibilities and Rights Journal, Vol 17, No. 3, (September), 161-172.

Ehrenberg, R.G., and M.L. Bognanno 1990, "Do Tournaments Have Incentive Effects?" The Journal of Political Economy, 98(6), 1307-1324.

Eriksson, T. 1999 Executive compensation and tournament theory: Empirical tests on Danish data. Journal of Labor Economics, 17,262-80.

Fama E. and Jensen Michael C, 1983 'Agency Problems and Residual Claims,' Journal of Law and Economics, Vol. 26, No. 2:327-349

Frick B., J. Prinz and K. Winkelmann, 2003. "Pay Inequalities and Team Performance: Empirical Evidence from the North American Major Leagues", International Journal of Manpower, 24(4), pp. 472-488.

Ghosh, Arijit 2003 Board Structure, Executive Compensation and Firm Performance in Emerging Economies: Evidence from India. Indira Gandhi Institute of Development research, August 2003:1-38

Gomez Mejia, L. (Ed.) 1994. Executive compensation: a reassessment and a future research agenda, Greenwich, CT, JAI Press.

Hall, Brian J. and Jeffrey B. Liebman. 1998. "Are CEOs Really Paid Like Bureaucrats?" Quarterly Journal of Economics 107:3 (August): 653-691.

Hart, O., Holmstrom, B., 2002 "A theory of firm scope", MIT department of Working paper, 02-42.

Hoi, Stan, Robin Ashok & Tessoni Daniel 2007, Sarbarnes-Oxley: Are audit committees up to the task? Managerial Auditing Journal, 22(3): 255-267

Hughes, J, The Greenbury report on directors' remuneration. International Journal of Manpower, 17(1), 1996,4-9

Jane, W.J. 2010, "Raising Salary or Redistributing It: A Panel Analysis of Major League Baseball," Economics Letters, 107,297-299.

Jensen, Michael C. 1993. The Modern Industrial Revolution, Exit and the Failure of Internal Control Systems. Journal of Finance (July): 831-880.

Jensen, Michael C. and William H. Meckling 1976. "Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure." Journal of Financial Economics 3, no. 4 (October): 305-360.

Katayama, H., and H. Nuch 2011, "A Game-Level Analysis of Salary Dispersion and Team Performance in the National Basketball Association," Applied Economics, 43(10), 1193-1207

Kato, T., K., and Long, C. X. 2006. Executive compensation, firm performance, and corporate governance in China: Evidence from firms listed in the Shanghai and Shenzhen Stock Exchanges. Economic Development and Cultural Change, 54 (4), pp. 945-983.

Lambert, R. A., Larker, D. F. and Weigelt, K. 1993 The structure of organizational incentives. Administrative Science Quarterly, 38,438-461.

Lazear, E.P. 1989, "Pay Equality and Industrial Politics," The Journal of Political Economy, 97(3), 561-580.

Lazear, E.P., and S. Rosen 1981. "Rank-Order Tournaments as Optimum Labor Contracts," The Journal of Political Economy, 89(5), 841-864.

Lee, K. W.,B. Lev, and G. H. H. Yeo. 2008. Executive Pay Dispersion, Corporate Governance and Firm Performance, Review of Quantitative Finance and Accounting. 30:315-338.

Levine, D.I. 1991, "Cohesiveness, Productivity, and Pay Dispersion," Journal of Economic Behavior and organization, 15,237-255.

Lin, B.-X., Lu, R. 2009 Managerial power, compensation gap and firm performance--evidence from Chinese public listed companies. Global Finance Journal, 20,153-164.

Main, B. G. M., O'reilly Iii, C. A. & Wade, J. 1993 Top executive pay: Tournament or teamwork? Journal of Labor Economics, 11,606-628.

Marchand, J.T., T.M. Smeeding, and B.B. Torrey 2006, "Salary Distribution and Performance: Evidence from the National Hockey League," Working Paper, Department of Economics and Center for Policy Research, Maxwell School of Citizenship and Public Affairs, Syracuse University and Population Reference Bureau.

Masson, Robert T. 1971 'Executive Motivations, Earnings, and Consequent Equity Performance', Journal of Political Economy, 79(6), 1278-1292.

Martin, J. 1981, "Relative Deprivation: A Theory of Distributive Injustice for an Era of Shrinking Resources," in Research in Organizational Behaviour, L. L. Cummings and B. M. Staw, eds., Vol. 3 (Greenwich, CT: JAI Press), 53-107.

Mehran, Hamid, 1995, 'Executive Compensation Structure, Ownership, and Firm Performance', 'Journal of Financial Economies' 3 8(2), 163-184.

Milgrom, P., and J. Roberts 1988, "An Economic Approach to Influence Activities in Organizations," American Journal of Sociology, 94, S154-S179.

Milgrom, P., and J. Roberts 1992, Economics, Organization, and Management (Upper Saddle River, NJ: Prentice Hall).

Mohanty, P., 2002. 'Institutional Investors and Corporate Governance in India', Available at http://www.nseindia.com/content/research/Paper42.pdf

Murphy, K.J. 1999. Executive compensation. In Handbook of Labor Economics, 1st edn. vol. 3, ed. O. Ashenfelter and D. Card. Amsterdam: Elsevier, pp. 2485-563.

O'Reilly, C. A., Main, B. G. M. & Crystal, G. S. 1988. CEO compensation as tournament and social comparison: a tale of two theories. Administrative Science Quarterly, 33, 257-74.

Parthasarathy Aditya, Menon K, & Bhattacharjee D, Firm Performance and Governance: An empirical study. Economic Policy Review, Vol. 41, No. 39 (Sep. 30-Oct. 6, 2006),pp. 4139-4147

Paul, Jonathan M1992, 'On the Efficiency of Stock Based Compensation', Review of Financial Studies, 5(3), 471-502.

Perry, T. (2000). Incentive compensation for outside directors and CEO turnover. Working paper. Indiana University, Kelly School of Business.

Ramaswamy, R., and R.E. Rowthorn 1991, "Efficiency Pays and Pay Dispersion," Economica, 58(232), 501-14.

Rosen, S. 1986. Prizes and incentives in elimination tournaments. The American Economic Review, 76, 701-15.

Ross, Stephen A. (1973). The economic theory of agency: The principal's problem. American Economic Review 62(2): 134-139.

Rost, K, Osterloh, M. (2009), Management fashion Pay-for-Performance for CEOs, Schmalenbachs Business Review61(4), 119-149.

Schaefer, Scott, (1998), 'The Dependence of Pay Performance Sensitivity on the Size of the Firm', Review of Economics and Statistics, 80(3), 436-443.

Shleifer, A and Vishny, R (1986).Large Shareholders and Corporate Control. Journal of Political Economy, 94(3): 461-488

Sloan, Richard G (1993), 'Accounting Earnings and Top Executive Compensation', Journal of Accounting and Economics, 16,1-3 (January-July): 55-100.

Smith, Adam (1776). The Wealth of Nations. Edited by Edwin Cannan, 1904. Reprint edition 1937. New York, Modern Library.

Wiseman, F, and S. Chatterjee (2003), "Team Payroll and Team Performance in Major League Baseball: 1985-2002," Economics Bulletin, 1(2), 1-10.

www.cmie.com--for data regarding the Directors' remuneration and company performance. http://www.directorsdatabase.com/Clause49.asp: Accessed on 15th July, 2011

http://www.business-standard.com/india/news/no-salary-rise-for-sunil-mittal-this-year-airtel/444599/: Accessed on 15th July, 2011

http://e.viaminvest.com/A3IncentiveBasedCompensatio n/AppToA3AgencyModels/Intuitive_explanations.asp: Accessed on 15th July, 2011

Ayan Ghosh (1) Dr. Rashmi Aggarwal (2)

(1) IMT, Ghaziabad, [email protected]

(2) Associate Professor, IMT, Ghaziabad Table-1 Result of the regression analysis of the Directors' Remuneration, Sales Turnover and Profit after Tax Regression Statistics Multiple R 0.197905192 R Square 0.039166465 Adjusted R Square 0.026440193 Standard Error 14610.46761 Observations 154 ANOVA df SS MS Regression 2 1313927496 656963748 Residual 151 32233330315 213465764 Total 153 33547257811 F Significance F Regression 3.077607091 0.048970609 Residual Total Coefficients Standard Error tStat (Constant) 10622.8750122 1525.4118904 6.9639388 Sales Turnover 0.0892780 0.0359826 2.4809459 Cum, Directors' -0.0000077 0.0000093 -0.8288836 remuneration P-value Lower 95% Upper 95% (Constant) 0.0000000 7608.9678919 13636.7821325 Sales Turnover 0.0142003 0.0181765 0.1603651 Cum, Directors' 0.4084746 -0.0000260 0.0000106 remuneration Lower 95.0% Upper 95.0% (Constant) 9608.9678919 13636.7821325 Sales Turnover 0.0181765 0.1603651 Cum, Directors' -0.0000260 0.0000106 remuneration