Board Structure, Executive Compensation and Firm Performance in Emerging Economies: Evidence from India

This paper examines the empirical relationship between board structure, CEO compensation and firm performance in the context of an emerging economy, India. Using panel data on 462 manufacturing firms from the Indian corporate sector for the period 1997 to 2002 I would like to explore two specific issues. First, I have examined how the structure of the corporate board in terms of size and proportion of non-executive directors affect the firm performance. This study also finds that the identity of the Chief Executive Officer matters; if the CEO is related to the promoter(s), the company performs better. Second, I have examined how the level and different components of executive compensation have an effect on the firm performance. The empirical findings indicate that size of the board and proportion of non-executive directors have a non-linear relation with firm performance. There is a threshold level on size of the board at 11 and proportion of non-executive directors at 73 % beyond which the performance of the firm starts decreasing. The relationship between executive compensation and firm performance is also found to be non-linear. There is also a saturation level on board compensation, beyond which the performance does not increase. The result suggests that institutional characteristics of emerging economies may support management structures, which are different from those predicted by earlier studies. JEL classification: G35, J33, C29