Directors Share-Based Compensations and Performance: A Case of the Top 100 MCG Index Companies

1.0 Introduction Organization or corporation exists based on conviction of an internal and external party. As an internal party, the board of directors (BODs) is the highest governing body and the most important component as a workforce in a company in order to achieve the companies’ goals and objectives. Therefore, organization usually compensates the BODs for their effort and their diligence in managing the company through salary, bonus, allowances, fees and shares. In today’s practice, the share option or stock option grants are new instrument of compensation introduced for the BODs in aligning their interests with shareholders. As a result, top management will be more motivated to strive towards achieving the firms’ performance. However, there is one major issue arise regarding the compensation. It is due to the circumstances where the compensation given and the performance or contributions towards the companies are not aligned. Consequently, the Board of Directors (BODs) does not serve shareholders’ interests which might resulted in agency problem. Particularly, agency cost is borne by the principal but currently, shareholders adjusted the management compensation in order to transfer the agency cost to the agent. One of the mechanisms to make it success is to apply the performance-based pay. The compensation of the BODs is determined by the level of the performance company achievement. One of the determinations is using the share–based payment. Share options and share grants are an entitlement which gives right to the buyers (directors, employees) but it is not an obligation to purchase before the options expiration time and at an agreed price which commonly the price is lower than the market price. As defined by Jeffrey (2008), stock options typically represent a right granted to the holder of the option to acquire shares of a company’s stock in the future at a fixed price called the exercise price or strike price. This research emphasizes on share-based compensation which are designed primarily to motivate directors to exert greater effort. Share options privatize the firm’s monitoring task into the hands of its directors. Each director which is equipped with share-based compensation is motivated to monitor other employees to make sure her peers do not harm the firm and that they do their best to maximize its value. Director share options and share grants produce more responsible directors, one would observe better fulfillment of board tasks in order to serve shareholders’ interests. It is supported by California Public Employees’ Retirement System (CalPERS); one of the nation’s largest public pension fund which proposed that 50 percent of director’s total compensation are in share-based. In addition to that, the issue also was further explained by the Financial Reporting Standard 2 which emphasized on the measurement and recognition of the share options. In a nutshell, the fundamental purpose of the study is to synthesize the broad literature on how directors’ share-based compensation influences firm performance. Henceforth, the main purpose of this study is to investigate the relevance of directors’ share-based compensation in influencing firm performance in Malaysia. Specifically, the study is conducted to achieve the following sub-objectives: i. To explore on the share option and share option grant as one of the elements used in directors’ compensation in Malaysia.