Nexus between firm performance and remuneration: an emerging market evidence

Purpose This research investigates the effect of firm performance on the remuneration of the CEO, directors and executives (key management employees) of firms listed on the Pakistan Stock Exchange (PSX). To further deepen the analysis, we divided the sample data into groups based on firm size, ownership type (family vs non-family) and quality of corporate governance and re-examined this pay-performance relationship. Design/methodology/approach The study’s sample comprises 215 nonfinancial PSX-listed firms from 2010 to 2022. The sum paid to the CEO, directors and executives in pay and bonuses, perquisites, and stock options is used to calculate remuneration. This study considered a market-based approach to measuring firm performance, i.e. Tobin’s Q, with firm size, leverage and stock beta as control variables. The fixed-effect model (FEM) based on the Hausman test is used for regression analysis. Furthermore, accounting-based performance measurements (ROA and ROE) and GMM regression techniques are used to assess the robustness of the results. Findings The findings indicate that firm performance has a strong positive impact on the remuneration of the CEO and executives of the sample firms. Still, it has an insignificant impact on the director’s remuneration. Further, we found that past firm performance significantly positively affects CEO and executive remuneration in large, family-owned and weakly governed firms. In contrast, past firm performance significantly positively impacts director remuneration in small and non-family-owned and strong-governed firms. Originality/value This study demonstrates the relationship between firm performance and the remuneration of the CEO, directors and executives simultaneously. Furthermore, this study divides the sample firms according to firm size, governance and family ownership, a method not previously tested.