Remuneration committees, executive remuneration, and firm performance in Indonesia

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The failure of large companies such as WorldCom, Enron, and Satyam (often called “Enron India”), has caused great concern among investors and regulators. To reduce fears and provide confidence, in 2000, Indonesia itself introduced the Good Corporate Governance Guidelines through the National Corporate Governance Committee, followed by the 2006 version the formation of certain board committees and the latest edition of June 2018, that registered companies “Must have” audit, nominations, and remuneration committees. In Indonesia, a nomination and remuneration committee is formed to manage the compensation of board of directors and executives and is expected to support a mechanism of good corporate governance.

In Indonesia, the formation of a Nomination and Remuneration Committee has been recommended in the GCG General Guidelines (Financial Services Authority, 2014). Moreover, the prevailing capital market regulations encourage public companies to disclose the Nomination and Remuneration Committee. In practice, there are 122 out of 494 (25%) public companies that have a Nomination and Remuneration Committee and disclose it in an annual report.

This article is based on agency theory as an analysis of the board of directors which is believed to be an important element of corporate governance that is responsible for monitoring, controlling, and connecting companies with their external environment. The previous studies revealed that the existence of the Remuneration Committee (RC) in the corporate governance structure can provide significant benefits to the level of risk of the company, increase the level of voluntary disclosure, effectiveness of the committee in reducing agency problems, monitoring and advising executive management on salary decisions that reduce agency costs and lead to better performance.

This article specifically examines the relationship between RC and executive remuneration and the board of directors, as well as company performance in Indonesia during the voluntary RC formation period. We studied 847 samples of companies listed on the Indonesia Stock Exchange (IDX) during the period 2014 to 2017 by testing the OLS Regression.

This article found that remuneration committees are positively related to executive remuneration levels and company performance. Specifically, further testing showed that higher remuneration is only associated with higher performance in companies with remuneration committees. This result showed that the committee remuneration plays an important and effective role in determining the remuneration of senior company officials, which motivates these officials to perform effectively and is associated with higher company performance. This article has implications to the development of literature on remuneration in Indonesia, regulators and company management in Indonesia and other emerging markets, it can also assist companies in maintaining company sustainability through appropriate remuneration schemes for directors and executives, and in evaluating the performance of remuneration committees. Finally, this article provides advice to regulators and companies registered in Indonesia to reveal more details about the remuneration package of their board of directors and executives.

Author: Raden Roro Widya Ningtyas Soeprajitno Details of this research available at: https://www.sciencedirect.com/science/article/pii/S2405844020302978

Harymawan, I., Agustia, D., Nasih, M., Inayati, A., & Nowland, J. (2020). Remuneration committees, executive remuneration, and firm performance in Indonesia. Heliyon, 6(2), e03452.

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