The nexus between executive compensation and performance: Case of Islamic Banks

Abstract

The aim of this study is to investigate the nexus between executive compensation and performance in Islamic banks. The relationship was examined through the direct effect of performance and moderating effect of governance on performance. This study uses static and dynamic panel regression (GMM). These models are applied to determine the impact of performance on executive compensation by using two different approaches: the traditional and the dynamic views. The generalized method of moments (GMM) model was employed to avoid the endogeneity biases in regression estimation. The econometric models have different measures of performance (accounting and market-based measures). The results endorse the dynamic relationship between pay and performance. The executive pay depends on accounting and market performance measures. The effect of performance is more important in dynamic model. The moderating effect of governance on the relation performance-pay was only demonstrated with ROE and EPS performance measures. This study provides the first comprehensive empirical study on the pay- performance relationship in the setting of Islamic banks through cross country analysis. The findings contribute to provide better understanding of the dynamic connectedness between pay and performance with the incorporation of the moderating effect of governance.

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