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Do Boards Govern Executive Remuneration in Indian Banks? An Econometric Exploration

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Abstract

This paper uses new and unique bank-level data to investigate whether board governance determines executives’ remuneration and if the pay-governance relationship changes across bank ownership groups in India. The findings based on dynamic pay model estimated using two-step system GMM approach reveal that (i) past pay levels hold significant predicting power for the future level of executives’ pay, (ii) executive remuneration is significantly responsive to forward-looking market-based profitability measures, and (iii) individual board attributes play a significant role in pay setting in the Indian banking industry. Frequent board meetings and a more significant proportion of female directors on board moderate the executive remuneration packages. The results further infer that the board’s monitoring abilities considerably differ across ownership groups, with boards play a more prominent role in private banks, while boards of public sector banks lack adequate autonomy to determine executives’ pay. The results validate the “managerial power” approach, suggesting that any weaknesses in governance structure (especially in private banks) may inhibit bank boards from effectively performing their monitoring functions in optimal pay fixation.

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Notes

  1. This is defined in the annual reports of banks, as per the Department of Economic Affairs (Banking Division) notification F.No. 20/1/2005-BOI dated 9th March, 2007, Ministry of Finance, Government of India.

  2. Note here that the insignificant coefficient on Durbin-Wu Hausman test confirms the exogeneity of lagged performance measures in the pay-performance relationship (see Table 13 in Appendix A).

  3. Windmeijer (2005) showed that corrected estimates of variance provide more accurate and robust results and approximates the finite sample variance.

  4. These results are not reported for the sake of brevity and can be available upon request.

  5. The authors would like to acknowledge the anonymous referee for this valuable suggestion.

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  1. Department of Humanities and Social Sciences, Indian Institute of Technology Roorkee, Roorkee, Uttarakhand, 247667, India

    Rachita Gulati & Madhur Bhatia

  2. Waikato Management School, University of Waikato, Hamilton, New Zealand

    Geeta Duppati

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  1. Rachita Gulati
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Appendix

Appendix

See Tables 12 amd 13.

Table 12 Definition of board attributes included in the board index
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Table 13 Estimates of Durbin–Wu Hausman test
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Gulati, R., Bhatia, M. & Duppati, G. Do Boards Govern Executive Remuneration in Indian Banks? An Econometric Exploration. J. Quant. Econ. 20, 211–255 (2022). https://doi.org/10.1007/s40953-021-00282-8

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