DETERMINANTS OF EXECUTIVE COMPENSATION: EVIDENCE FROM A FAMILY-FIRM DOMINATED ECONOMY

Abstract

This thesis investigates the role and effect of corporate governance and political connections on determining executive compensation in the Kingdom of Saudi Arabia (KSA). Given that the framework of Saudi corporate governance is significantly influenced by the Anglo-American model, the thesis aims to evaluate the validity of this model in constraining executive compensation in emerging economies such as Saudi Arabia. The KSA has a unique institutional setting: high ownership concentration, high use of political connections, an absolute monarchical political system and the use of Islamic law. Moreover, the thesis examines the impact of political connections on the arrangements for executive pay and emphasises the principal-principal conflict in family controlled-firms. To achieve these objectives, deductive and inductive methods are employed and three empirical studies are conducted using a sample of 114 non-financial Saudi listed firms during 2008-2015.
Unlike the situation in the Anglo-American economies, pay structure in the KSA is found to be limited to fixed and short-term performance-based compensation (i.e. bonus). This is because long-term incentive methods such as stock options are not allowed for regulatory reasons. Furthermore, although the Saudi corporate governance regulations have been enforced since 2006, the data shows a boom in average executive compensation levels exceeding 100% during the period 2008 to 2015 with a weak link to firm performance. Meanwhile, the Anglo-American model of corporate governance is found to be inadequate to curb managerial incentives in the KSA due to the absence of other effective formal institutions (e.g. an effective legal system). Surprisingly, independent board directors and remuneration committees, which are key recommendations of corporate governance best practice, are found to be associated with higher levels of executive compensation. Moreover, while the model suggests that concentrated ownership could close the gap between shareholders’ and managers’ interests, thereby shrinking agency costs, the results show the opposite; i.e. ownership concentration is a root cause of principal-principal problems and leads to generous executive pay.
Meanwhile, other informal institutions are observed to influence compensation policy. The study finds that the phenomenon of political connections is prevalent in Saudi Arabia especially in non-family firms and is significantly related to higher levels of executive pay. These connections are derived from the domestic culture of Saudi Arabia which is significantly influenced by wasta (personal relationships). The findings also reveal that there are significant differences between family-controlled firms and their non-family counterparts in terms of corporate governance attitudes and the use of political connections. However, the practices of executive compensation are virtually the same in both type of firms. Overall, the thesis demonstrates that the adoption of corporate governance models developed in other country contexts, with no consideration to the cross-country institutional differences, leads to undesirable consequences and facilitates higher executive remuneration.