Performance Sensitivity of Executive Pay: The Role of Foreign Investors and Affiliated Directors in Japan
Manuscript Type: Empirical Research Question/Issue: This study investigates the effects of corporate governance factors on the firm performance and executive compensation linkage. Specifically, we examine how domestic corporate-appointed directors, bank-appointed directors and foreign ownership moderate the relationship between firm profitability, sales growth, and executive bonus pay in Japanese firms. Research Findings/Insights: Using a sample of the largest Japanese manufacturing companies from 1997 to 2007, we find that corporate-appointed directors positively moderate the relationship between firm growth and bonus pay, while foreign shareholders exhibit a positive moderating effect on the relationship between firm profitability and bonus pay. Bankappointed directors are straddled between their profitability orientation and relational role: They link firm profitability and bonus pay, but also show positive influence on the firm growth and bonus pay relationship. Theoretical/Academic Implications: This study makes a contribution to research on ownership heterogeneity and executive compensation by empirically showing that different owners and directors affiliated with certain ownership groups have varied implications on the firm performance–executive pay relationship. It also makes a contribution to research on corporate governance change by providing insights on how different actors facilitate shifts in the linkage between performance and pay. Practitioner/Policy Implications: Our findings offer insights to stakeholders to pay attention to ownership structure and board composition in acknowledging the varied financial motivation of executives to pursue growth and/or profitability.