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Performance and Compensation in Emerging Markets

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Performance and Compensation in Emerging Markets
Table of Contents
  1. Introduction
  2. Research Questions
  3. Literature Surveys
  4. Methodologies
  5. Key Findings and Conclusions
  6. Critique
  7. Additional Research Ideas
  8. References


The two articles covered in this paper analyze the connection between executive compensation and performance in non-financial firms. Raithatha and Komera (2016) analyze a sample of 3,100 Indian firms to establish how compensation correlates with accounting and marketing performance. Their central conclusion is that better accounting performance leads to higher compensation, while better market performance does not (Raithatha & Komera, 2016). Aslam, Haron, and Tahir (2019) analyze a sample of 50 Pakistani firms with the same purpose. Their key findings are that better past performance is conducive to higher compensation, but higher compensation also results in slightly better future performance (Aslam et al., 2019). Thus, both articles arrive at similar albeit not identical conclusions.

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Research Questions

Raithatha and Komera (2016) pose a question of how executive compensation correlates with the firm performance in India from 2002 to 2012. Aslam et al. (2019) investigate the relationship between the firm performance and CEOs/board of directors’ compensation in Pakistan from 2009 to 2016. Both articles do so to evaluate the effectiveness of pay-performance practices in the firms working in the emerging markets.

Literature Surveys

Raithatha and Komera (2016) briefly cover the literature that relates to different aspects of their research question. They analyze the previous studies of interrelation between firm performance and executive compensation, both past and contemporaneous (Raithatha & Komera, 2016). The authors also mention the studies concentrating on firm-specific characteristics, including size, leverage, and risk, as well as their relation to pay-performance practices (Raithatha & Komera, 2016). Finally, Raithatha and Komera (2016) note that the previous studies of executive compensation and firm performance have concentrated on Anglo-Saxon markets, and the studies of Indian firms only analyzed small samples during short periods. These observations allow the authors to conclude that their work, while based on previous research, is the first scholarly work to analyze the relation between firm performance and executive compensation and in the emerging market of India on such a scale.

Aslam et al. (2019) offer a concise literature review of the frameworks that relate directly to their work. First, they cover the literature concentrating on the pay-performance framework, which explains how better firm performance in the past leads to better executive compensation, just as stipulated by agency theory and managerial power perspective (Aslam et al., 2019). Secondly, they review the literature concentrating on the performance-pay framework, which explains how a high level of CEO/directors’ remuneration may lead to better firm performance in the future, in full accordance with the stewardship theory (Aslam et al., 2019). However, the authors do not devote a particular part of their literature review to either firm-specific characteristics or country-specific studies, unlike the article described above.


Both studies use the Generalized Method of Moments of GMM to analyze the interrelation between performance demonstrated by the firms and executive compensation. Raithatha and Komera (2016) use GMM as it allows “to account for the potential endogeneity (between pay and performance) problem in examining the pay-performance relationship among the sample firms” (p. 161). Aslam et al. (2019) also emphasize that GMM “controls the problem of potential endogeneity that may arise due to the potential reverse causality between the pay and performance” (p. 191). However, Raithatha and Komera (2016) only use one model for the pay-performance framework, while Aslam et al. (2019) develop two models for the pay-performance and performance-pay frameworks, respectively. The most important variables for Raithatha and Komera (2016) are consolidated executive compensation, the ratio of earnings before interest and taxes to total assets, return on equity, Tobin’s Q, and annual stock return. For Aslam et al. (2019), these are CEO/directors’ remuneration, both cash-based ad non-cash based, the ratio of earnings before interest and taxes to total assets, Tobin’s Q, and earning per share. Both studies also consider firm-specific variables, such as size, leverage, risk, and family ownership.

To interpret their numerical findings, the authors use partially coinciding theoretical perspectives. Raithatha and Komera (2016) employ the agency theory, which depicts the firm manager or agent and the shareholder or principal as antagonists. While manager seeks to receive higher compensation, the principal aims to increase the profit for the company ownership, which is why “compensation contracts should be designed to align the interests of managers (agents) with those of shareholders (principals)” (Raithatha & Komera, 2016, p. 160). Aslam et al. (2019) also use agency theory to interpret the results obtained within the pay-performance framework. However, they employ stewardship theory as well to interpret the results obtained within the performance-pay framework. Unlike agency theory, stewardship theory vies senior management not as a constellation of self-serving individuals, but as a cohesive team that governs “the assets of the entity for the betterment of the organization” (Aslam et al., 2019, p. 189). Hence, both studies use agency theory to interpret the findings, but Aslam et al. (2019) supplement it with stewardship theory as well.

Key Findings and Conclusions

Raithatha and Komera (2016) discuss several notable findings of their study. First of all, their analysis reveals considerable consistency in executive compensation among all the firms studied (Raithatha & Komera, 2016). Additionally, when they evaluate firm performance by accounting-based criteria, they find a strong correlation between executive compensation and performance (Raithatha & Komera, 2016). However, when they evaluate firm performance by the market-based criteria, the relationship between pay and performance proves to be elusive (Raithatha & Komera, 2016). Finally, the authors also establish “the absence of pay-performance relationship among the business group affiliated firms” as compared to stand-alone firms (Raithatha & Komera, 2016, p. 168). Thus, the findings demonstrate support for agency theory, where rewards received by the executives depend directly on their prior performance.

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Aslam et al. (2019) also establish a relationship between compensation and performance in their sample. According to them, “the CEOs cash and non-cash base compensation of the board of directors are affiliated with the past market base performance” (Aslam et al., 2019, p. 194). However, Aslam et al. (2019) also stress that there is “a weak but significant relationship” between the CEO/directors’ non-cash compensation and their future performance (p. 194). As a result, the article offers strong support for the interrelation between past performance and payment, as assumed by agency theory. It also provides support for the interrelation between payment and future performance, as stipulated by stewardship theory – although, in this case, the causal connection is not as stressed.


The advantages and downsides of the articles become especially evident after a mutual comparison. Both articles use the same methods and similar sets of variables to analyze the same relation in the firms working in the emerging markets, which makes such comparison especially worthwhile. Raithatha and Komera (2016) could benefit from attention to not only the pay-performance framework but the performance-pay framework as well. Doing so is especially important because of the potential reverse causality between the two, which means studying the effect of past performance on pay also mandates analyzing the impact of compensation on future performance (Aslam et al., 2019). As for Aslam et al. (2019), their study could benefit from a larger sample. While Raithatha and Komera (2016) analyze the performance of 3,100 firms, Aslam et al. (2019) limit themselves to 50 firms – albeit the most prominent ones, according to the Karachi Stock Exchange. The authors themselves recognize a “limited number of observations” as one of the downsides of their study (Aslam et al., 2019, p. 194). Enlarging the sample would improve the study’s representativeness significantly and pave the road for more well-founded recommendations.

Additional Research Ideas

One of the most obvious ways to approach the further study of the subject is to broaden its geographic scope. While the articles covered in this paper concentrate respectively on India and Pakistan, the possibilities for analyzing the interrelation between executive compensation and firm performance in the emerging markets are not limited to these two countries. Aslam et al. (2019) themselves mention studies on the same issue in Indonesia and Malaysia. Thus, one possible approach to further research on the subject is analyzing other examples of emerging market economies of Southeast Asia.

Apart from that, further research may also concentrate on the influence of the world market on the pay-performance practices of firms. For example, Raithatha and Komera (2016) never mention the crisis of 2007-2008, despite the fact that it is right in the middle of the timespan of their study. As a result, the possible effects of the crisis on executive compensation, firm performance, and their interrelation remain without a proper analysis, as if suggesting the crisis has no effects on them at all. Filling this knowledge gap is another promising approach to take in the study of executive compensation and firm performance in emerging market economies.


  1. Aslam, E., Haron, R., & Tahir, M.N. (2019). How director remuneration impacts firm performance: An empirical analysis of executive director remuneration in Pakistan. Borsa Istanbul Review, 19(2), 186-196.
  2. Raithatha, M., & Komera, S. (2016). Executive compensation and firm performance: Evidence from Indian firms. IIMB Management Review, 28, 160–169.

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