Do institutional framework and its threshold matter in the sensitivity of CEO pay to firm performance? Fresh insights from an emerging market economy

Abstract

This study examines the role of institutional quality and its threshold in the sensitivity of CEO pay to firm performance in an emerging market economy, using a generalized method of moments, Driscoll and Kraay's nonparametric covariance matrix estimator, and robust dynamic panel threshold. Bureaucratic quality and corruption control weaken performance-based pay for CEOs, while law and order strengthen it. The overall institutions allow boardroom backscratching which biases executive compensation contracts. The study shows that the country operates below the institutional quality threshold values required to spur performance-based pay for CEOs. The study concludes that institutions matter in CEO pay-firm performance nexus.