Determinants of CEO Compensation:
Empirical Evidence from Listed Banks of Bangladesh

AbstractCEO Compensation has received massive attention in recent years because CEO
compensation plays a pivotal role to meet the company’s objectives or shareholders goals.
Determinants of CEO compensation are examined through firm performance, corporate
governance mechanisms (including board composition and ownership structures) andexternal monitoring parameters. This study focuses on to find out the relationship between
pay and firm performance; evaluates the effectiveness of board composition through size ofboard of directors, the role of independent directors and presence of female directors insetting CEO pay; impact of ownership structures through institution, foreign investor anddirector ownership on CEO pay. The empirical research conducted on listed banks of
Bangladesh during the period from 2006 to 2013. This research finds a positive relationshipof CEO pay with firm performance and firm size. CEO pay is higher due to weak corporate
governance mechanisms. This study also finds that independent directors, female directors,
institutional investors, and directors’ can’t play their monitoring role in setting CEO
compensation. The results recommend that the banks should disclose executive informationin more details particularly CEO information including performance incentives. Moreover,
the regulators or govt. should more emphasize on efficient corporate governance mechanisms
which will reduce the agency cost of the shareholders.
Keywords: agency cost, CEO compensation, Corporate governance, external monitoring.

1. INTRODUCTION
Agency problem occurs due to separation of management and shareholders andmanagement compensation has received massive attention in academic research to mitigate
the agency problem. Alignment of the incentive of top management with the interests ofshareholders has been characterized as an important mechanism of corporate governance.
Jensen and Meckling (1976) argue that the agency problem can be solved throughmanagement compensation and implementation of good governance. Clarkson et al (2011)
also stated that performance based remuneration packages and effective monitoring definedas encompassing corporate governance and remuneration disclosure are the two ways tomitigate the agency problem. Managerial compensation plays a pivotal role in motivating,rewarding, and disciplining managers to follow and maximize specific firm objectives orshareholders’ wealth (Jensen and Murphy, 1990 and Firth et al, 1999).

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To date, most of the prior empirical research examined the relationship between pay
and performance and effectiveness of corporate governance mechanism on executive
compensation using firms only US, UK, Japan, Australia, China, Hongkong and otherdeveloped economies. But the relationship between top management pay and performance;
effectiveness of corporate governance mechanisms through board composition and ownership
structures on executive pay has not been examined yet in developing country like Bangladesh.
As a result, there is a dearth of research using data from Bangladeshi firms. This gap ofresearch inspires me to do my research in CEO pay related to Bangladesh and filling up thisgap is my research motivation of this study.
Banking sector in Bangladesh is growing very fast and it is considered as thepromising sector due to its contribution to a significant percentage in national GDP. Banking
sector is well structured, comply the rules regulation properly and disclosure is higher incompare to other companies in Bangladesh. Moreover, CEO information is disclosed
separately in the financial statements of the banks. But there is no relevant study on how
CEO compensation is determined in listed banks of Bangladesh.
The research question of this study is to find out the main determinants of CEO
compensation in listed banks of Bangladesh. To do so, I will try to find out whether there is apositive relationship between pay and performance in CEO pay. Shareholders are widelydispersed and less informed about the business activities which may increase firm wealth andcan’t monitor the each activity of managers and investment opportunities. But effective
corporate governance mechanisms monitor the activities of managers and mitigate the agency
cost born by the shareholders. Thus, I will evaluate the effectiveness of the corporate
governance mechanisms through board composition and ownership structures in setting CEO
pay. Executive compensation research finds that firm size is a significant determinant in
CEO compensation. I will try to find out whether this is also applicable in the listed banks ofPage 2 of 47

Bangladesh. These are the main empirical research question that I seek to address in thisstudy.
This paper contributes to the pay literature in many ways: First, to the best of myknowledge, there are no previous studies relating to determinants of CEO compensation inbanks of Bangladesh. So, this study will provide a remedy for the paucity of compensation
research and will add value to the CEO pay literature in Bangladesh. Second, this paper
investigates the relationship among CEO pay, firm performance, corporate governanceparameters (such as board composition and ownership structure) and external monitoring andmultivariate analysis has been done considering all the variables. Hence, this multivariate
analysis will help to understand which factors contribute significantly in determination of
CEO pay. Third, this study will help to understand the mechanisms of corporate governancesystems in banks and how it works and to what extent it is effective in determination of CEO
pay. Finally, the findings of this study will enrich the corporate governance mechanisms andpay performance relationship will contribute to work as a better alignment of management
and shareholders by reducing agency problem in the listed banks of Bangladesh.
This study is organized as follows: Section 2 shows setting CEO compensation inbanks of Bangladesh; Section 3 explains the selection process of sample; Section 4 describes
literature review and hypothesis development; Section 5 presents research method including
research models and data sources; Section 6 describes analysis of the results and implication.
This section explains the disclosure pattern of CEO remuneration in annual reports,
descriptive statistics, correlation matrix and multivariate analysis of CEO pay level models
and CEO pay at lagged models; Section 7 describes additional analysis considering the time
adjustment of CEO pay level and CEO pay at lagged models. Section 8 presents conclusion
by giving summary of the findings and some recommendations.

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2. SETTING CEO COMPENSATION IN BANKS OF BANGLADESH
Executive compensation information is not disclosed properly in many countries andeven pay setting process is also not clear or transparent. Board of the director decides the
CEO pay without the approval of shareholders. Most of the firms form a compensationcommittee comprised of nonexecutive directors or outsiders to determine the executive pay(Firth et al, 1999). Main (1993) stated that compensation committee may not play the
independent role due to reciprocal relationship with the executive directors. Firth et al (1999)
stated that executive compensation is also determined by comparing the size and industry of
the similar group. Firth et al (1999) also find that in UK, firms are adopting Cadbury
committee’s recommendation on corporate governance and setting the top level
remuneration. Pay setting process is determined by the boards, or compensation committee or
corporate governance guidelines or peer group review. This pay setting process also varies
from industry to industry and country to country.
In Bangladesh, CEO pay setting process in listed banks is different from othercountries. There is no separate compensation committee for the executive compensation. The
board of directors of the bank appoints the competent Chief Executive Officer (CEO) withthe approval of Bangladesh Bank. Bank companies require approval of Bangladesh Bank in
respect of appointment, dismissal, release or removal of Bank CEO in accordance with Bank
Companies Act 1991 (15(4)). One of the responsibilities of the board of directors is toappoint an honest, efficient, experienced and suitable CEO to obtain confidence of thedepositors, strengthen the financial base and ultimately ensure better good governance.

Before an appointment of CEO, Bank requires to submit full bio-data, terms andconditions of appointment including direct and indirect payable salary and allowances andPage 4 of 47

facilities to Bangladesh bank1. Bangladesh Bank provides the guideline for CEO in terms ofsalary and allowances which are:
1. Bank financial condition, area of operation, business ume, earning capacity of the bank,CEO’s qualification, age, experience and peer banks remuneration should be consideredin fixing the salary and allowances of the CEO.
2. Total monthly salary should be determined and total salary should be comprised of
direct salary covering basic pay, house rent, festival allowance, other allowances andother facilities (e.g. provident fund, utility bill, leave fare assistance etc.) should bespecified in amount in Taka.
3. Terms of salary allowances and other facilities that specified in the terms and conditionsof appointment can’t be changed during the tenure but in case of renewal, salary can be
newly fixed considering the job performance of the CEO.
4. CEO should not entitle any other direct and indirect facilities (e.g. dividend,
commission, club expenses etc.) other than salary allowances and other facilities thatare mentioned in (2).
5. CEO has to pay the tax and bank will not pay the income tax of the CEO and CEO is
not allowed to provide service above age of 65.
But Banks do not disclose the pay setting process clearly and total executives
information is disclosed in the financial statements in total. Only few banks disclose the total
executive information in details with incentive information. In Bangladesh, there are no usesof stock options like other countries. CEO can’t hold any shares as per bank regulation andno opportunity to earn dividend income and capital gain. CEO receives basic salary, house
rent, house maintenance, medical allowance, provident fund, bonus and other facilities andcomponents of CEO compensation varies bank to bank and performance of CEO.

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3. SELECTION PROCESS OF SAMPLE
Total 236 firm years are considered as sample for listed banks of Dhaka Stock
Exchange during the period from 2006 to 2013. Bangladesh Securities and Exchange
Commission (BSEC), the regulatory authority, introduced corporate governance guideline in2006 and corporate governance guideline (amendment) in 2012 to ensure proper monitoring
and governance by the firms. All the banks have to prepare the corporate governancecompliance checklist since 2006. Only few banks disclose the corporate governanceinformation in details voluntarily before implementation of corporate governance guideline(amendment) 2012.
The name of the listed banks is given in the Table 1.
[Insert Table 1 about Here]

4. LITERATURE REVIEW & HYPOTHESIS DEVELOPMENT
Determinants of CEO compensation are examined on the basis of prior empiricalresearch and managerial theories of the firm. In this study, level of CEO remuneration is usedand dependent variable is the total CEO remuneration. The potential determinants of CEO
pay that I will examine are performance measures (ROA and Tobin’s Q); corporate
governance mechanisms through board composition (board size, independent directors andfemale directors) and ownership structures (institutional ownership, foreign investors anddirectors’ ownership); firm characteristic (firm size) and external monitoring (debt to total
equity). On the basis of prior empirical research, hypothesis are described below:

Firm Performance
Executive remuneration should be linked to firm performance in order to stimulate the
CEO to maximize shareholders’ wealth. This pay performance relationship is the basic
principle of principal agent theory (Dechow and Sloan, 1991; Baker, 1992; and Kaplan,
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1994).

There is a positive relationship between executive remuneration and firm

performance (Coughlin and Schmidt, 1985; Murphy 1985; Jensen and Murphy, 1990;
Conyon and Peck, 1998; Ramswamy et al, 2000) but other studies find that there is no
relationship or weak relationship between firm performance and executive compensation(Conyon et al, 1995; Zhou, 1999; Fernandes, 2008 and Luo and Jackson, 2012).

Empirical evidence finds mixed result by using the same performance measures indifferent parts of the world. The reason is explained by Luo and Jackson (2012) and theystated that pay performance relationship varies based on different data, institutions and model
specifications. There is no relevant study how CEO pay is determined in the listed banks of
Bangladesh in compare to the developed countries. To align the interest of managers with theinterest of owners, agency theory says that manager’s compensation work as a function offirm performance (Kaplan, 1994 and Murphy, 1985, 1999).

Thus, I develop my first

hypothesis in this way:

H1: Ceteris paribus, there is a positive relationship between firm performance and CEOpay.
H1(a): Ceteris paribus, there is a positive relationship between ROA (return on assets) andCEO pay.
H1(b): Ceteris paribus, there is a positive relationship between Tobin’s Q and CEO pay.

Corporate Governance Mechanisms
Shleifer and Vishny (1997) study provided that executives try to maximize their selfinterest from the shareholder resources. Thus, Firms have developed corporate governancemechanisms to control the self serving behavior of managers and to mitigate the agency costborne by shareholders.

Agency problems are greater due to weak corporate governancemechanisms which ultimately lead to higher CEO compensation in US firms (Core et al, 1999).
Basu et al (2007), using 174 large Japanese firms, also find that top executive pay is higher inPage 7 of 47

firms with weaker corporate governance mechanisms. Ozkan (2007) stated that corporate
governance mechanisms such as board composition and ownership structures have theinfluence on compensation policy and reduce the agency conflicts between executives andshareholders. Therefore, effective corporate governance mechanisms (including board
composition and ownership structures) are important for controlling managerial compensation.

Board Composition
Board Size
A company’s board is the primary internal corporate governance mechanism responsible forsetting management compensation, design and implementation of incentive system andmonitoring senior management (Finkelstein & Hambrick, 1988, 1996; Lorsch, 1989; Jensen,
1993 and Tosi, and Mejia, 1997). The board of directors has the power to control the activities of
CEO and restrict CEO compensation. Jensen (1993) and Lipton and Lorsch (1992) study find that
small boards are more effective than large boards. Studies related to US find that large board
size is not effective in monitoring the CEO’s remuneration but Fung et al (2001) stated thatfirms with a large number of directors tend to restrain CEO remuneration. Large board
increased the monitoring capability and having more business expertise in the board reduces thedecision making power of CEO (Conyon and Peck, 1998 and Guest, 2008).
In Bangladesh, the size of board member should not be less than 5 and not more than 20
according to corporate governance guideline 2006 and 2012. The empirical evidence shows that
small board is effective where as some other papers report that large board is effective in
restricting the CEO pay. This indicates that empirical evidence is mixed and thus I develop
the hypothesis as:
H2a: Ceteris paribus, there is a positive relationship between the size of the board of directors
and CEO pay.
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H2b: Ceteris paribus, there is a negative relationship between the size of the board of
directors and CEO pay.

Independent Directors
Board effectiveness depends on the presence of nonexecutive directors in the board(Fama and Jensen, 1983; Weisbach, 1988 and Core et al, 1999). It is assumed that non executive
independent directors are effective and independent and work on behalf of the shareholders
interest. The greater the number of outside directors on the board, the stronger the corporate
governance of the firm (Conyon and Peck, 1998 and Weisbach, 1988). Independent directors
have added incentive to closely monitor the managers when they own relatively highstockholdings (Fama and Jensen, 1983). Parthsarathy et al (2006) stated that presence of thehigher number of independent directors in the board ensures proper monitoring of the firm andlimits managerial power to act against the interest of the shareholders.
Corporate governance literature indicates that there is a negative relationship between
proportions of nonexecutive directors and top management pay but empirical evidence is mixed(Boyd, 1994; Kren and Kerr, 1997). Some studies find a significant positive relationship of
proportion of nonexecutive director with the CEO pay (Croci et al, 2012; Firth et al, 1999;
Lambert et al, 1993; Ezammel and Watson, 2002 and Cheng and Firth, 2006).
In listed banks of Bangladesh, there must be at least one tenth of independent director in theboard (minimum one) according to corporate governance guideline 2006. But corporate
governance guideline 2012 revised it and changes made for independent directors from one tenth
to one fifth of the board. This change implies that the regulatory authority emphasizes more on
the presence of independent directors in the board to play the monitoring role on behalf of theshareholders. The number of board size is minimum five and maximum twenty where as
number of independent director ranges from one tenth to one fifth. It is difficult to play the
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effective monitoring role by small number of independent directors. Moreover, independent
directors receive only meeting fee which is not sufficient enough to play their supervisoryrole. Thus, I assume that role of independent directors will not be effective enough to restrict
the CEO pay and develop my next hypothesis as:

H3: Ceteris paribus, there is positive relationship between independent directors and CEO
pay.

Female Directors
Earlier empirical research rarely focused on the presence of female directors in theboard. Nowadays, gender diversity or proportion of female directors in the board also plays acrucial role in effective governance of banks. Robinson and Dechant (1997) stated thatfemale directors are hard workers and having good communication skills with problem
solving and decision making capacity in the entire board. Eagly and Carli (2003) find thatfemales reach to directorship position and demonstrate that they are highly proficient,diligent, and sincere about responsibilities and take best preparation before board meetingand improve board effectiveness. Adams and Ferreira (2009) examined the role of female
directors and find that female directors are regular in board meeting and try to join inmonitoring committees. Smith et al (2006) represent the importance of presence of female
directors in the board and find that female directors are efficient in decision making due totheir better understanding capability of the market and their presence in the board increase theimage of the firm that ultimately contribute in firm performance. Carter et al (2003) finds a
positive relation between percentage of female directors and firm performance. This implies
that firm performance is good when there is a presence of female directors in the board. If thefirm performance is good then CEO will expect positive return from the banks.

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In Bangladesh, females’ involvement is increasing in the corporate sector and they
demonstrate their capability by participating in the board of directors. The number of female
directors in the banking sector is also increasing over the year because they have the capacity
to effectively manage the business. On the other hand, it is also argued that most female
directors are appointed by the controlling shareholders and in this situation, generally female
directors work on behalf of the interest of the controlling shareholders and they have no voiceor remain silent in the board. Thus, I assume that a positive relationship between female
directors and CEO pay and develop my hypothesis as:
H4: Ceteris paribus, there is a positive relationship between the female directors and CEO
pay.

Ownership Structures
Ownership structures have the influence on executive compensation. In this study,
three categories of ownership structures such as institutional ownership, foreign investors anddirector ownership are examined on CEO compensation in listed banks of Bangladesh.

Institutional Shareholdings
Institutional investors are normally banks and financial institutions and hold a large
percentage of ownership of the firms and monitor the activities of the management.
Individual investors can’t create pressure on management due to their less investment as well
as dispersed ownership structure. But institution plays a significant role as a large blockholders and control the discretionary decision making power of management and executive
compensation. Parthasarathy et al (2006) study stated that institution plays an active role inthe shareholder meetings of the company, voice their opinion and ensure that managers needto win their support on matters that require shareholder approval. They also said that
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institution can play a monitoring role like independent directors by restricting compensationof CEO and other executives if it is unfavorable for the shareholders. Firth et al (1999) andOzkan (2007) find that institutional shareholders are associated with lower CEO pay whichmeans that higher level of institutional share holders restrain CEOs from awarding himselfvery high compensation.
The empirical evidence is mixed. There is a positive relationship between pay andinstitutional shareholding which implies that monitoring role of institutional shareholders iseither weak or absent (Parthasarathy et al, 2006). Croci et al (2012) stated that institutional
ownership is associated with high levels of CEO cash and total compensation in continental
Europe, especially in family firms. They also added that institutional investors encouragefirms to provide performance based compensation to their CEOs.
In this study, only listed banks are considered. So, institutional owners of these banks arepeer groups i.e. other banks and financial institution in the same industry. It is assumed that
institutional owners may not play their monitoring role effectively in restricting the CEO pay
in the same industry. Moreover, institution may motivate to provide performance based
compensation to the CEO. Thus develop my hypothesis as:

H5: Ceteris paribus, there is a positive relationship between the shareholdings ofinstitutional shareholders and CEO pay.

Directors Shareholdings
Directors are more active and concern about business activities when they have shareownership in the firm.

Shleifer and Vishny (1986) stated that director shareholdings

stimulate to reach best firm performance. When directors have the ownership, they can earn
through cash and stock earnings. Directors can earn dividend and capital gain from thePage 12 of 47

shares. Therefore, they have less demand of cash compensation to align the interests ofexecutives and shareholders. Ozkan (2007) study finds that CEO receives low compensation
when director ownership is high. Firth et al (1999) find that there is a negative relationshipbetween director shareholdings and director’s pay. Since director earns rewards based on
stock price performance so they receive low cash compensation and no controversy overexcessive pay exists. There is also empirical evidence of positive relationship between
director shareholdings and directors pay. Basu et al (2007) study find positive and statisticallysignificant relation between top executive pay and director ownership which implies that top
executive earned higher income when board owns a higher percentage of shares. Moreover,director holds the executive positions and decide their own compensation which give raise
the excessive remuneration.

In listed banks of Bangladesh, directors have the scope to earn both dividend and capitalgain from the shares but CEO can’t hold any shares as per bank regulation. So, there is no
scope to earn dividend and capital gain from share price. CEO only receives the cash
compensation rather than stock earnings. The empirical evidence of the relationship between
director ownership and CEO compensation is mixed. Thus, I want to examine the relationshipbetween directors’ ownership and CEO pay in the listed banks of Bangladesh and thus
develop the hypothesis as:

H6a: Ceteris paribus, there is a positive relationship between the proportional shareholdingsof directors and CEO pay.
H6b: Ceteris paribus, there is a negative relationship between the proportional shareholdingsof directors and CEO pay.

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Foreign Ownership
Foreign investors are more concerned about their investment and they demand highquality and better qualified executive in managing the business and expect a good return fromtheir investment. This demand leads to a positive relationship between CEO pay and thepresence of foreign investors. If the performances of the executives are outstanding, foreign
investor want to pay a good amount in response of their performance. Uchida (2006)
examined the relation between stock option adoption and foreign shareholding and described apositive relation between the stock option compensation and foreign shareholding. Fung et al(2001) stated that CEO pay is higher because foreign shareholders demand to hire the best
possible professional managers.
In Bangladesh, foreign investors’ investment in the banking sector is increasing day byday. But there is no scope of using stock option or stock based incentive schemes for theCEO. As the foreign investors are concerned about their investment, they demand highly
talented candidate as CEO and have the interest to pay high remuneration. Thus, I develop
my next hypothesis as:
H7: Ceteris paribus, there is a positive relationship between the presence of foreign
ownership and CEO pay.

External Monitoring (Leverage)
Debt holders are more active and play their monitoring role when management
activities are against of their interest.

There is comparatively less research to find out therelationship between executive remuneration and leverage ratio. Leverage is used as proxy of
external monitoring in compensation related empirical research. Previous research find that
there is a negative relationship between leverage and pay performance sensitivity of theCEOs in banking industry (Houston and James, 1995; John et al, 2010). John and Qian (2003)
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find that CEO has low pay performance sensitivity in the banking industry in compare to
manufacturing firms and this difference due to debt ratios between two firms. John and John
(1993) observed that debt holders control the firms and decision making power ofmanagement when there is existence of external debt. Firms with high leverage try to avoid
stock options (Kato et al, 2005). Fung et al (2001) document that CEO receives low
compensation when firms have high debt ratios and this indicates that debt holders createpressure on the board and CEO.
In listed banks of Bangladesh, there is no use of stock option for CEO compensation.
Debt holders have the monitoring capacity to restrict the CEO pay when CEO’s performanceand activities are again the interest of the debt holders. Thus, I assume a negative relationshipbetween debt holders and CEO pay and develop my next hypothesis as:
H8: Ceteris paribus, there is a negative relationship between leverage and CEO pay.

Firm Characteristics
Firm Size
In compensation studies, firm size plays a significant role in determination of
executives’ remuneration. There is a positive relationship between firm size and executive
compensation (Conyon, 1997; Core et al, 1999; Fung et al, 2001; Ghosh, 2003;
Parthasarathy et al, 2006 and Lazarides et al, 2008). Firth et al (1996 and 1999) stated thatpay size relationship is observed all around the world where research has been conducted.
Larger firms pay higher compensation to the CEO (Conyon and Murphy, 2000 and Ozkan,2007).
It is common that large firms will pay high remuneration to the executives because ofhuge amount of sales (interest revenue) or profit in large firms. In listed banks of Bangladesh,

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I also assume this positive relationship between firm size and CEO pay following Conyon,
1997; Core et al, 1999 and Fung et al, 2001 studies and thus develop my hypothesis as:
H9: Ceteris paribus, there is a positive relationship between firm size and CEO pay.

5. RESEARCH METHOD
5.1 Models
A Pooled cross sectional method has been applied to test the hypothesis. The CEO pay
model is following with the methodology used by Luo and Jackson (2012) and Kato et al(2007).
LNTCEOP=β0+β1FirmPerformance+β2Board Composition+β3Ownership Structures +β4
External monitoring+ β5 Firm Characteristic + ɛ
where LNTCEO represents the natural logarithm of total CEO remuneration. Total CEO
pay is rightly skewed and transformed into natural logarithm of total CEO pay to adjust thenormality of total pay. Previous empirical studies of other countries related to Compensation
also considered the logarithm form of compensation. Firm performance is divided by internaland external performance following Core et al (1999). Internal performance is explained by
ROA and external performance is represented by Tobin’s Q which considers the market valueof shares and growth of the firm.
The models are further restructured on the basis of above equation:
LNTCEOP = β0 + β1 ROA + β2 LNBSIZE + β3 ID +β4FEDIR+β5INT+β6OWNDIR+β7FINVTR+β8DEBT2TE+β9LNASSET+ɛ …………………………..(1)LNTCEOP = β0 + β1 TOBIN’S Q + β2 LNBSIZE + β3ID+β4FEDIR+β5INT+β6OWNDIR+β7 FINVTR+β8DEBT2TE+β9LNASSET+ɛ……………..(2)LNTCEOP = β0 + β1 ROA +β2 TOBIN’S Q + β3LNBSIZE+β4ID+β5FEDIR+β6INT+β7OWNDIR+β8 FINVTR+β9DEBT2TE+β10LNASSET+ɛ……………..(3)Definition of variables and their expected relationship with CEO pay are given in the Table 2.
[Insert Table 2 about Here]
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5.2 Data Sources
The major sources of this empirical analysis are annual report of banks that areavailable at specific bank websites and website of Dhaka Stock Exchange (DSE). In thisstudy, the data set includes the information of listed banks total CEO pay, performancemeasures such as ROA and Tobin’s Q, corporate governance mechanisms through board
composition such as board size, percentage of independent directors, presence of female
directors in the board and ownership structures like percentage of ownership by institution,
foreign investors and director ownership and external monitoring information such as
leverage and firm characteristic such as firm size. All of the above information is collectedfrom directors’ report, corporate governance report, profit and loss account, balance sheet,and notes or any other part of the annual report where it is available.

6. ANALYSIS OF RESULT AND IMPLICATION
6.1 Disclosure Pattern of CEO remuneration
All the listed banks of Bangladesh have to disclose CEO compensation information as
separate line item in the profit and loss account and details information in the notes ordirector report or corporate governance report. The required CEO compensation is totalcompensation including basic salary, house rent, house maintenance, medical allowance,
festival bonus, incentive bonus, provident fund etc. In practice, all listed banks disclose theCEO compensation information as separate line item in the profit and loss account. But mostof the banks do not disclose the total CEO remuneration in details breakdown. Only few
banks disclose the total CEO remuneration with breakdown information in details anddisclose the bonus information as festival bonus and incentive bonus. Bangladesh is a Muslim
country and there are two big religious festivals and CEO receive bonus in these festivals.
Some banks disclose only bonus in the breakdown of CEO information but it is difficult to
identify whether it is festival bonus or incentive bonus. Incentive bonus information is not
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disclosed separately and the reason might be incentive bonus is adjusted with basic salary or
total salary. Since details CEO remuneration information are not available in all listed banks
thus only total cash compensation of the CEO is measured as the executive compensation
following Parthasarathy et al,2006; Firth et al ,2006 and Leone et al,2006 studies.

Moreover, total cash compensation is considered because total CEO compensation reflects
the past and current performance and this is consistent with Gaver and Gaver, 1998 andComprix and Mueller, 2006. Compensation figures of the CEO are expressed as Bangladeshi
Taka.

FIGURE -1- TREND OF TOTAL CEO PAY FROM 2006 TO 2013

Figure 1 illustrates the mean of annual total CEO compensation for the period 2006 to
2013. The mean of total CEO salary increased remarkably over the year and it is highest in2013 and lowest in 2006 as expected. The total CEO remuneration is rightly skewed. Total
CEO remuneration is transformed into natural logarithm form to adjust for normality of totalpay.

6.2 Descriptive Statistics
Table 3 represents descriptive statistics of each variable for the sample of 236 firms
during the period from 2006 to 2013. Total CEO pay is expressed in thousands in descriptive
statistics. The mean CEO pay is TK. 7,788,196, ranging from a maximum of Tk. 21,606,090
and minimum of Tk. 361,080 with a standard deviation of Tk. 3,534,794. The median CEO
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pay is Tk. 7,836,187. The average of total CEO pay in listed banks in Bangladesh is only Tk.
7,788,196 which is much lower in compare to the other developed countries 2. But incompare to per capita GDP in Bangladesh, CEO compensation in banking sector issignificantly higher than average salary in Bangladesh 3 . Reaz and Arun (2006) also point out
that executive in banks are the highest paid executives among any Bangladeshi companies.
CEO’s in the banking industry received the highest compensation in compare to otherindustries all over the world and this finding is consistent following the Fernandes (2008).

Performance is measured by two ways: Return on Assets (ROA) and Tobin’s Q.
Performance measured by ROA and the mean of ROA is 2.48% and a range from -20.52% to7.78% and standard deviation is 2.72. The mean of Tobin’s Q, performance measurement offirm value or growth, averages is 1.14 and ranges from 0.92 to 5.78. The Tobin’s Q in listedbanks of Bangladesh is higher than US banks but lower than UK firms 4.
[Insert Table 3 about Here]The mean (median) board size is 13.90 (14) and ranges from minimum 5 to maximum
27 with a standard deviation 4.25. The average board size in US banks is 13 (Pathan and Faff
, 2013); 9 for UK companies (Veprauskaite and Adams ,2013); 13.80 in China (Liang et al,2013) and 29.99 in Japan (Basu et al ,2007). Thus, average board size is similar to US andChina.
On average, the percentage of independent directors is 7.19% and a range fromminimum 0% to maximum 50% with a standard deviation 8.36%. The minimum percentage
of independent directors in the board is one tenth that is minimum one (corporate governanceguideline 2006) and one fifth (corporate governance guidelines, 2012). But descriptive
statistics represent that minimum percentage of independent director is 0% which implies thatsome banks don’t complying the minimum number of independent directors according toPage 19 of 47

corporate governance guideline 2006 and 2012 and even some banks mentioned in the
checklist as recruitment of

independent directors is in process. The percentage ofindependent director is 70.91% in US banks (Pathan and Faff, 2013); 23% in China (Liang etal, 2013); 24% in Thailand (Pathan et al, 2007), 50.61% in India (Parthasarathy et al, 2006).
Thus, the percentage of independent director in listed banks of Bangladesh is very low incompare to other countries.
The mean percentage of female directors in the board in listed banks of Bangladesh is
11.48% which is almost similar in China 11% (Liang et al, 2013) but in US banks, thepercentage of female directors is only 7.94%. (Pathan and Faff, 2013).
The mean percentage of Institutional shareholding is 14.26% and maximum is64.82% where as standard deviation is 11.15%. Institutional ownership in listed banks of
Bangladesh is only 14.26% where as institutional ownership is 31.4% in Uk (Ozkan, 2007);
16% in Hongkong (Firth et al,1999); and 17.84% in India (Parthasarathy et al,2006) which
implies that institutional ownership is too low in compare to other countries. The proportional
shareholding of directors mean is 19.76% and maximum is 57.15% with the standard
deviation is 13.65. The average director shareholding in UK is 4.19% (Ozkan, 2007) and in
Hongkong is 44% (Firth et al, 1999) which indicates that average director shareholdings in
Bangladesh is higher than UK but lower than Hongkong companies. The mean percentage of
foreign investors is only 2.11% with a maximum of 37.42 % in Bangladesh where as average
foreign share ownership is 16 % in Chaina (Fung et al, 2001) and 24% in Japan (Sakawa etal., 2012). It is difficult for the few foreign investors to play the monitoring role in restricting
the CEO pay in listed banks.
The mean of leverage ratio is 12.15% and with a standard deviation of 15.26. Total
asset average mean is 97588.4 million and ranges from 14302.84 to 549979.1 million with astandard deviation of 71731.33 million.
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6.3 Correlation Matrix
Pearson correlation matrix between each variable is reported in Table 4. CEO
compensation (Natural logarithm form) is positively associated with ROA (0.1777) andTobin’s Q (0.0091) indicating that the higher the performance of banks, the higher the CEO
compensation in listed banks of Bangladesh. Board size (Natural logarithm form) (0.0428)
have a positive relationship with CEO pay. Independent directors (0.3137) have the positive
relationship with CEO pay which implies that independent directors are not effective enoughto monitor the CEO pay. Female directors have the positive correlation (0.1772) with the
CEO pay and it indicates that female directors monitoring role is not effective to restrict CEO
pay because they are appointed by the controlling shareholders and as a result, they have no
voice in the board.
[Insert Table 4 about Here]
There is a positive relationship of CEO pay with director’s shareholdings (0.2051)
and institutional shareholdings (0.1771) but negative relationship with foreign investors’shareholdings (-0.0092). This result implies that both institution and directors are noteffective enough to monitor the CEO pay. Total asset (Natural logarithm form) is considered
as firm size and there is a positive correlation of CEO pay and firm size (0.2778) as expected.
This positive correlation indicates that firm size play a significant role in CEO pay like otherdeveloped countries. There is not high correlation with other variables that may generate
multicolinearity problem. This data set avoids the multicolinearity problem.

6.4 Multivariate Analysis
6.4.1 Determinants of CEO pay level models
In this study, determinants of CEO pay are examined on the basis of firm
performance, corporate governance (board composition and ownership structures), external
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monitoring and firm characteristic. Table 5 represents the regression models (Equation 1, 2,
and 3) of CEO pay levels. In regression analysis, total CEO remuneration is transformed into
natural logarithm form because CEO pay is highly right skewed. Another advantage of using
natural logarithm of total CEO remuneration as dependent variable is that regression
coefficients measure the proportionate effects of a variable on compensation, rather than
Taka value effect.
Performance measures are examined separately as well as jointly on total CEO
remuneration. Return on assets (ROA) in equation (1), Tobin’s Q in equation (2) and both
ROA and Tobin’s Q are presented in equation (3) while considering all other factors areconstant. The regression result from equation 1 represent a good fit for the model of CEO pay
and explained by 34.40% variability in CEO compensation.
In equation 1, total CEO pay is positively related with ROA after controlling otherfactors and it is significant at 1% level. The empirical result therefore supports hypothesis
1(a) which is there is a positive relationship between CEO pay and ROA and the result is
consistent with Murphy, 1985; Jensen and Murphy ,1990; Fung et al, 2001; Kato andKubo,2006 and Basu et al, 2007 studies. The result indicates that listed banks of Bangladesh
determined their CEO pay on the basis of ROA. CEO receives high compensation when ROA
is high.
[Insert Table 5 about Here]The second hypothesis 2a assumes that there is a positive relationship between board
size and CEO pay where as the hypothesis 2b assumes that there is a negative relationshipbetween board size and CEO pay. The empirical result shows that board size is negatively
related to CEO pay and significant at 1% level. The empirical result is consistent with thepredicted hypothesis 2b and rejects the hypothesis 2a. The result is consistent with theConyon and Peck, 1998; Fung et al, 2001 and Guest, 2008 studies but opposite of the result
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in US (Core et al, 1999). The negative relationship implies that large board has the greater
monitoring capacity and business expertise which reduce the decision making power of theCEO. Moreover, CEO faces difficulties to convince or satisfy more directors in the board andfailure to get reward for high compensation.

The third hypothesis is there is a positive relationship between CEO pay andindependent directors. I got a strongly positive relationship between independent directors
and CEO pay and the result is consistent with Croci et al ,2012; Cheng and Firth, 2006;
Ezammel and Watson, 2002; Firth et al, 1999; Lambert et al, 1993 studies. This finding canbe explained in several ways. First, independent directors are not effective enough to monitor
the CEO pay which indicates corporate governance is weak. Second, CEO pay is highbecause independent directors are satisfied enough for the performance of CEO. Third,
independent directors are appointed by the board and the board tries to appoint their selected
person as independent directors and the independent directors play their role on behalf of theboard. Fourth, independent directors increase the CEO pay and use it as a comparison
benchmark to reappoint themselves in the following years. Fifth, independent directors
receive only meeting fee and the amount of meeting fee is only Taka five thousand per
meeting. This amount is not sufficient enough to take the responsibilities and monitor theactivities of the firm. Finally, according to Corporate Governance guideline 2006, there must
be one tenth (1/10) independent director in the board (e.g. minimum is one) and Corporate
Governance guideline (amendment) 2012 revised it and new guideline requires the one fifth(1/5) independent directors in the board. But some banks disclosed in the compliance ofcorporate governance checklist, they will appoint the independent director soon or it isalready in process. So, the numbers of independent directors are not sufficient enough to playtheir monitoring role in the board.
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The fourth hypothesis assumes that there is a positive relationship between presenceof female directors and CEO pay. In this study, I found a positive relationship between
female directors in the board and CEO pay and the result is significant at 1% level. This canbe explained in several ways: First, The result implies that CEO is more active and performs
better when board is directed and controlled by female directors. Second, Female directors
have affordability to pay high compensation i.e. Banks having female directors have muchmoney and have the ability to pay high compensation. Third, female directors are effective
enough in the board and their presence increase the firm performance which ultimately
increase the higher CEO pay. Finally, female directors are appointed by the board and theboard is mainly controlled by the controlling shareholders i.e. sponsor shareholders.
Controlling shareholders also appoint their nominated person as CEO and maximize their selfinterest. Thus, controlling shareholders decide everything according to their own way andfemale directors have no voice in the board about CEO compensation issue.

Institutional investors may not play their monitoring role effectively in the same
industry and thus develop the hypothesis as there is a positive relationship between CEO pay
and institutional ownership. I got a positive relationship and the result is significant at 5%
level. This result supports the hypothesis 5 and consistent with the study of Parthasarathy etal, 2006; Croci et al, 2012 and Fernandes et al, 2012 studies. This result implies thatmonitoring role of institutional shareholder is either absent or weak to restrain the CEO pay
in listed banks. This result can be explained in several ways: First, institutional investors
motivate firms to provide performance based compensation package to the CEO. Second, themean percentage of institutional ownership in listed banks is only 14.26% which is not large
enough in compare to other countries to play their monitoring role 5. Third, only listed banks
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are considered in this study, so other banks and financial institution don’t play theirmonitoring role to restrict the CEO pay within the same peer group or industry. Finally,
institutional investors are passive investors and institutional monitoring is not an important
governance mechanism in banks to restrict CEO pay.

Hypothesis 6a assumes that there is positive relationship between CEO pay anddirector shareholdings where as hypothesis 6b assumes that there is negative relationshipbetween CEO pay and director shareholdings. The empirical result reports the significant
positive relationship and supports the hypothesis 6a and rejects the hypothesis 6b. The
empirical result shows a positive relationship between director shareholdings and CEO pay
and it is significant at 1% level. This result is consistent with the study of Basu et al (2007).
Director holds shares of the banks and they earn the dividend income and capital
appreciation. But according to Bangladesh bank rules, CEO can’t hold any shares of the bankwhich indicates CEO can’t earn any dividend income or any capital appreciation from theshares. Directors try to compensate the CEO by paying high cash compensation including
basic salary, bonus, house rent allowance and house rent maintenance facilities. Moreover,most of the directors are the sponsor shareholders and sponsor shareholders control the board
in a way to increase their personal wealth. Reaz and Arun (2006) stated that sponsors
shareholder control everything such as appointment or firing of CEO and salarydetermination. Thus, sponsor shareholders try to appoint their nominated person as CEO whowill look at their interests and pay high to serve their own objectives.

CEO pay is higher because foreign shareholders more emphasize on recruiting highly
qualified CEO before their investment and thus develop the hypothesis 7 that there is apositive relationship between CEO pay and foreign investors. Foreign investors monitor
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properly and pay high if the performance of the CEO is good. The empirical result reveals a
positive relationship between foreign investors’ ownership and CEO pay but the result is not
significant. The positive relationship indicates that foreign investors pay a good amount inresponse of the CEO’s performance. But the mean percentage of foreign investors is only
2.11% in Bangladesh where as foreign share ownership is 16% in China (Fung et al, 2001)
and 24% in Japan (Sakawa et al, 2012). This few foreign investors can’t play theirmonitoring role properly in CEO pay in compare to other countries. But the empirical resultshows a positive relationship as expected.

External monitoring can also play a crucial role in CEO pay. External debt holders
can exert extra pressure on board to reduce the CEO compensation and thus develop the
hypothesis as there is a negative relationship between external monitoring and CEO
compensation. The coefficient is negative and significant at 5% level and this result support
hypothesis 8. The depositors are the major debt holders of the bank. The implication of thisresult is that when firm has high debt, debt holders perform their monitoring role by creating
more pressure on board and restricting the CEO pay and this result is consistent with Fung etal, (2001); Houston and James (1995) and John et al, (2010) studies.

Previous compensation literature finds that firm size is a significant determinant for
executive remuneration. The empirical result shows that firm size (represented by natural
logarithm of total assets) is positively and significantly associated with CEO pay as expected.
The result supports the hypothesis 9 and consistent with Conyon, 1997; Core et al, 1999;
Conyon and Murphy, 2000; Fung et al, 2001; Ghosh, 2003; Parthasarathy et al, 2006 andLazarides et al, 2008 studies. Firth et al (1996 and 1999) stated that pay size relationship is

Page 26 of 47

observed all around the world where research has been conducted and this is also applicablein listed banks of Bangladesh.

In equation 2, run the regression using another performance measure named as
Tobin’s Q considering all other factors are constant. Tobin’s Q represents the market value ofthe firm or growth of the firm. The model explains about 28.11% of the variability of the
CEO pay in Equation 2. The hypothesis 1(b) assumes that there is a positive relationshipbetween Tobin’s Q and CEO pay. The empirical result indicates a positive relationship and it
is significant at 1 % level and this result supports hypothesis 1(b) and consistent with the
Ozkan (2007) study in UK. The result implies that increase of the firm value or growth also
increases the CEO remuneration. The demand of highly professional and talented CEO isincreased due to increase of firm value or growth.

Most of the results in equation 2 are almost similar to those reported in equation 1.
For example- positive and statistically significant coefficients are observed for independent
directors, female directors, institutional ownership, director ownership, and firm size (total
assets). The empirical result reports a positive relationship between foreign investors’
ownership and CEO pay but it is not significant which is similar to equation 1. In equation 2,
the major differences are board size and debt to equity. In equation 1, the result reported thatboard size is negatively related to CEO pay and it is significant at 1% level. In equation 2, I
got the negative relationship with the CEO pay and the direction is similar with equation 1
which implies that large board is effective in restricting CEO pay but it is not significant.
Another difference is the debt to equity ratio. There is a negative relationship with the CEO
pay as like equation 1, because debt holders create more pressure on management and restrict
the CEO pay but the result is not significant in equation 2.
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In equation 3, I have considered both performance measure ROA and Tobin’s Q in
the same equation and run the regression. The model explains about 35.36% of the variabilityin CEO pay. ROA is positively and statistically associated with CEO pay and significant at
1% level. Another performance measure Tobin’s Q which represents the growth of the firm isalso associated with CEO pay and statistically significant at 1% level. This implies that firm
considers both performance measures in setting CEO compensation. In equation 3,
independent directors, female directors, institutional investors, directors’ ownership and firm
size are positively and significantly associated with CEO pay and the result is similar withequation 1 and 2. Foreign share ownership is positively related with CEO pay but it does notachieve statistical significance and this result is also similar with equation 1 and 2. The resultof board size and debt to equity ratio in equation 3 are similar to equation 1 but varies withthe equation 2. Board size is negatively associated with CEO pay in all equations and it isstatistically significant at 1% level in equation 1 and 3. This result implies that large board iseffective in restricting CEO pay and it is difficult for the CEO to increase the remunerationby convincing many directors in the board. There exists negative relationship between CEO
pay and debt to equity ratio in all the equations but the result is statistically significant inequation 1 and 3. This result indicates that debt holders have the capacity to exert pressure
on management activities and restrict the CEO pay if management activities are against theinterest of shareholders.

6.4.2 Determinants of CEO pay at lagged models
Determinants of CEO pay are also examined using the lag model in Table 6. Lag
model is considered because CEO pay might be based on previous year’s facts and figures.
Moreover, it requires minimum three months to publish the annual report. As a result,
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previous year’s firm performance, board characteristics, ownership structures and firm
characteristics might be significant factors for CEO pay. CEO pay is related to lagged
variables such as ROA, Tobin’s Q, LNBSIZE, ID, FEDIR, INT, OWNDIR, FINVTR,
DEBT2TE and LNASSET and denoted as ROA(-1), Tobin’s Q(-1), LNBSIZE(-1), ID(-1),
FEDIR(-1), INT(-1), OWNDIR(-1), FINVTR(-1), DEBT2TE(-1) and LNASSET(-1).
[Insert Table 6 about Here]The empirical result using the lagged models is almost same as like CEO pay level
models. CEO pay is positively and statistically significant to firm performance (ROA and
Tobin’s Q), percentage of independent directors, percentage of female directors, institutional
investors, and director ownership and negatively related to board size and debt to total equity.
CEO pay is positively related to foreign investors but not significant like CEO pay level
model. The only difference between CEO pay model and CEO lagged model is the firm size.
CEO pay is positively and statistically associated with firm size in CEO pay level model,
where as in lagged model, CEO pay is positively associated in three equations as expected
but statistically significant in equation 3 only. This result implies that previous year’s firm
size is also a significant factor for CEO pay.

The overall result concludes that previous years firm performance, board characteristics,
ownership structures and firm characteristics have significant influence on CEO pay and thisis evident using the lagged model in Table 6.

7. ADDITIONAL ANALYSIS
7.1 Determinants of CEO pay level models considering time dummy

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Table 7 represents the regression result of the determinants of CEO compensation after
controlling time effect. The result shows that time is a significant factor from 2008 to 2013 inexplaining the determinants of CEO pay.
[Insert Table 7 about Here]
There is no change of result in table 7 in compare to table 5 in terms of ROA, board
size, female directors, and institutional ownership after considering the time effect which
implies that the result of these variables are consistent with or without time adjustment.
Performance measured by ROA, female directors and institutional ownership are positively
and statistically associated with CEO pay where as board size is negatively and statisticallysignificant with CEO pay in equation 1 and 3.
But the result of some other variables directional sign or significance level becomechanged which implies that time has significant effect on these variables. Tobin’s Q is
positive in all equations as expected and the result indicates that CEO pay is positively
related to Tobin’s Q but statistically significant in equation 3 only. The empirical resultshows a positive relationship between independent directors and CEO pay in all equations as
before and this implies that independent directors are not effective in monitoring the CEOpay. But the result is statistically significant in equation 2 which reveal that independent
directors are affected by time factors. Director ownership is positively associated with CEO
pay in all equations as before and this indicates that directors appoint their nominated person
as CEO who will look directors interest and directors pay high compensation. But the result isstatistically significant in equation 1 and 2. Foreign investor ownership is also positively
associated with CEO pay as before and this time the result is significant in all equations after
controlling time effect. This result explains that foreign investors are highly concerned about
their investment and demand high quality talented CEO and pay high compensation. Debt tototal equity i.e. leverage is negatively associated with CEO pay in all equation as before andPage 30 of 47

the result point out that debt holders create pressure on CEO pay if CEO’s activities areagainst the interest of the debt holders but the result is not statistically significant after
considering the time dummy. The interesting finding is that firm size is negatively related to
CEO pay and statistically significant. The reason is CEO pay might be affected by change ofpolitical government in 2007-08 and stock market turmoil in 2010-11.

7.2 Determinants of CEO pay at lagged models considering time dummy
Table 8 represents the regression result of determinants of CEO compensationconsidering the lagged model after controlling time dummy. CEO pay is related to lagged
variables such as ROA, Tobin’s Q, LNBSIZE, ID, FEDIR, INT, OWNDIR, FINVTR,
DEBT2TE and LNASSET after controlling time dummy and denoted as ROA(-1), Tobin’s
Q(-1), LNBSIZE(-1), ID(-1), FEDIR(-1), INT(-1), OWNDIR(-1), FINVTR(-1), DEBT2TE(1) and LNASSET(-1). The empirical result shows that time has a significant effect on CEO
pay from 2008 to 2013.
The result of determinants of CEO pay is almost same between CEO pay level model
after controlling the time dummy (Table 7) and CEO pay lagged model after considering thetime dummy (Table 8) in terms of ROA, board size, independent director, female director,
institutional investors, director ownership, foreign investors, leverage and firm size. The only
difference is the performance measure named as Tobin’s Q. Tobin’s Q is positively andstatistically associated with CEO pay in both equations 2 and 3 in Table 8 which implies that
CEO pay depends on firm performance.
[Insert Table 8 about Here]The result of determinants of CEO pay in terms of ROA, Tobin’s Q, board size,
female directors, and institutional ownership are similar in comparing the CEO pay level
model (Table 5) and CEO pay lagged model after controlling time dummy (Table 8). This
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result shows that CEO pay is positively and statistically associated with firm performance(including both ROA and Tobin’s Q), female directors and institutional ownership andnegatively and statistically associated with board size. But the differences between these twomodels in Table 5 and Table 8 are percentage of independent directors, director ownership,
foreign investors, debt to total equity and firm size due to time effect. Independent directors
are positively and significantly associated with CEO pay in equation 2 only which indicatesthat they are not effective in restricting the CEO pay. CEO pay is positively and significantly
associated with director ownership in equation 1 and 3 and this implies that controllingshareholders monitor everything in their own way and nominated their selected person as
CEO and pay high to serve the controlling shareholders objectives. CEO pay is positively andstatistically associated with foreign investors after controlling time and this result means that
foreign investors are highly concerned about their investment and demand talented person as
CEO and pay high for their qualification, experience and performance. Leverage has no
impact on CEO pay after controlling time dummy which implies debt holders can’t createpressure on management when time is controlled. Firm size is negatively and statisticallyassociated with CEO pay. The relationship between firm size and CEO pay might be affectedby two factors which are change of political government in 2007-08 and stock market turmoil
in 2010-11.

8. CONCLUSIONManagement compensation research has failed to reach a strong conclusion that CEO
pay depends on firm performance due to mixed empirical evidence. The empirical result inthis study document a positive relation between CEO pay and ROA and the relationship is
significant at 1% level. The empirical result also reports there is a positive relationshipbetween Tobin’s Q (which represents the firm value or growth) and CEO pay and it is also
Page 32 of 47

significant at 1% level. These two findings indicate that CEO pay is determined on the basisof internal and external firm performance i.e. firm performance and this conclusion is evident
on the basis of the empirical results. Reaz and Arun (2006) study stated that CEOs contracts
in banks are linked to performance and the empirical result of this study supports thisstatement.

Board size is negatively and statistically related with CEO pay and it is consistent
with Conyon and Peck, 1998; Fung et al, 2001 and Guest, 2008 studies.

Theoretical

literature implies that small board is more effective then large board but this is not applicablein listed banks of Bangladesh. This study finds that large board restricts the CEO pay andmore effective than small board. Large board reduces the decision making power of the CEO
through proper monitoring and utilizing the business expertise. Furthermore, CEO becomes
failure to get reward for high compensation by convincing so many diversified businessexpertise directors. Independent directors can’t play their monitoring role in restricting CEO
pay because independent directors are not effective and independent. Independent directors
are appointed by the board and their renewal depends on whether independent directors work
on behalf of the board. Independent director receives only meeting fee and this amount is not
sufficient enough to play the supervisory role in the board. Moreover, the number of
independent directors is small enough to play their strong monitoring role in the board.
Female directors have the positive and significant relationship with CEO pay. This result canbe interpreted in two ways: CEO is more active and performs better when board is directed
and controlled by female directors because female directors are hard worker, timely decision
maker, efficient in managing the board and understand the market environment. This
attributes of females directors increase the image of the firm by creating more value to thefirm. On the other hand, female directors have no voice about CEO compensation issue
Page 33 of 47

because both female directors and CEO are appointed by the board and the board is mainly
controlled by the controlling shareholders (sponsor shareholders) to maximum their selfinterest.

The empirical result finds a positive relationship between institutional investors andCEO pay. This can be explained in two ways: First, institutional investors motivate firms togive performance based compensation to CEO. On the other hand, institutional role is either
absent or weak in listed banks of Bangladesh because the mean percentage of institutional
ownership is only 14.26% which is comparatively less in compare to other developed
countries. Moreover, institutional investors are passive investors and institutional monitoring
is not important governance mechanism in the same or peer group industry to restrict the
CEO pay.

Directors appoint their nominated person as CEO who will look at their interests andpay high compensation to CEO due to serve their own objectives. Moreover, CEO has noopportunity to earn dividend and capital gain from shares because as per bank regulation
CEO can’t hold any shares of the bank and directors try to compensate them by paying morecash compensation. The mean percentage of foreign shareholders is only 2.11% and this is
not sufficient enough to monitor the activities of the CEO in compare to other countries. But
the positive thing is that number of foreign investors and their investment is increasing
nowadays. CEO receives low compensation when the firm debt ratio is high which implies
that debt holders (mainly depositors) have the power to create pressure on the activities of theboard and the CEO remuneration. Finally, the empirical result reports that firm size is asignificant determinant in CEO compensation.

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The overall findings of this study are (1) CEO compensation is determined on thebasis of firm performance after controlling other factors; (2) CEO compensation is higher due
to weak corporate governance mechanisms in the listed banks of Bangladesh and (3) firm sizeis also a significant determinant in CEO compensation.
The results of this study should be interest to regulators, practitioners and academics
who are interested in determinants of CEO remuneration and the empirical results
recommend some suggestions to improve the pay literature in Bangladesh and reduce theagency problem between shareholders and executives. First, only few banks disclose thebreakdown information of total CEO remuneration. This makes difficult to do rigorous
research by considering all the components of CEO information. The regulatory authority
should more concentrate on disclosure of executives’ information with breakdown in details
and performance bonus or incentives should be clearly specified. Second, large board iseffective in monitoring CEO pay but role of independent directors are not effective enough tocontrol the CEO pay. Generally, the banks disclose the information in corporate governancechecklist that they complies the minimum requirement of independent directors. But whether
the independent directors are playing their role as independent is a matter of question. This
study also finds that institutions are not playing their monitoring role in limiting the activities
of executives and CEO pay. CEO pay is high due to weak corporate governance mechanisms
in listed banks. So, Bangladesh bank and Bangladesh Securities Exchange Commission(BSEC) should more emphasize on efficient corporate governance mechanisms. Third, inlisted banks, Board formulates two committees which are executive committee and audit
committee. Board decides the remuneration package of executives and collects the approval
from Bangladesh bank. Separate compensation committee is available in the firms ofdeveloped countries. But in listed banks, there is no separate compensation committee. So,
Bangladesh bank should introduce separate compensation committee to design effective
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compensation package for the executives. Fourth, this study finds that stock option and grants
are widely used in US and UK but there are no use of equity based incentives like stock
option and grant in listed banks of Bangladesh. The regulatory authority such as Bangladeshbank and Bangladesh Securities and Exchange Commission (BSEC) should introduce theoption and grant as incentive for the executives. This stock and grant will also help to reduce
the agency problem between the managers and shareholders.

END NOTES

1. Source: BRPD (Banking Regulation and Policy Department) circular letter no- 3, dated
February 1, 2006.
2. Fung et al, (2001) study reveals that the average cash compensation is USD 614,000 in
US ( Core et al, 1999); average pay is GBP 291,000 excluding option and other deferredcompensation in UK ( Conyon , 1997); average compensation for executives is $281,000
in Canada (Zhou,1999); average CEO pay in Hongkong is HK$ 4 million (Firth etal,1999). (Exchange rate on December 31, 2013 between: USD and TK. is 77.68; GBP
and Tk. is 128.6694; Hongkong and Tk. is 10.0177).
3. According to source of World Bank, GDP per capita income in Bangladesh is 957.82
USD (in 2013) or equivalent to TK. 74,403.46. (Exchange rate between USD and TK. is77.68 on December 31, 2013).
4. Pathan and Faff (2013) find Tobin’s Q is 1.07 in US banks where as Ozkan (2007) and
Veprauskaite and Adams (2013) study find Tobin’s Q is 1.64 and 1.56 in UK firms
respectively.
5. Institutional ownership is 31.4% in UK (Ozkan, 2007); 16% in Hongkong (Firth et al,1999); and 17.84% in India (Parthasarathy et al, 2006).

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Appendix
1. Table 1: Listed Banks in Dhaka Stock Exchange (DSE)
Obs
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

Name of Bank
ARAB BANGLADESH BANK
AL-ARAFAH ISLAMI BANKBANK ASIA
BRAC BANKCITY BANKDHAKA BANKDUTCH-BANGLA BANKEASTERN BANKEXIM BANKFIRST SECURITY ISLAMI BANKICB ISLAMIC BANKIFIC BANKISLAMI BANK BANGLADESH
JAMUNA BANKMERCANTILE BANKMUTUAL TRUST BANKNATIONAL BANKNCC BANKONE BANKPREMIER BANKPRIME BANKPUBALI BANKRUPALI BANKSHAHJALAL ISLAMI BANKSOCIAL ISLAMI BANKSOUTHEAST BANKSTANDARD BANKTRUST BANKUNITED COMMERCIAL BANKUTTARA BANK

Page 40 of 47

2. Table 2: Definition of Variables

Variables
Compensation
CEO Compensation

Variables Explanation

Predicted
Relationship

LNTCEOP

Natural Logarithm of Total CEO Pay

Return on Assets

ROA

Tobin’s Q

Tobin’s Q

Net Profit Before Tax/ Average Total
Positive
AssetsBook value of total assets minus book Positive
value of total Equity plus market valueof total equity divided by book value of
total assets

Performance

Corporate Governance
Mechanism
Board Structure
Information
Board Size

LNBSIZE

Natural Logarithm of Board Size

Positive
Negative
Positive
Positive

Independent Directors
Female Directors

ID
FEDIR

% of Independent directors in a board% of Female directors in a board

Institutional Ownership
Director’s Ownership

INT
OWNDIR

Foreign Investors

FINVTR% of ownership held by Institution% of Ownership held by all directors ina board% of Ownership held by Foreign
Investors

Positive
Positive
Negative
Positive

External Monitoring
Debt Ratio

DEBT2TE

Book value of total debt divided bybook value of total equity

Negative

Firm Characteristic
Firm Size

LNASSET

Natural logarithm of book value of
total assets

Positive

Ownership Information

Page 41 of 47

3. Table 3: Descriptive Summary Statistics
Obs.

Mean

CEO Pay (inthousands)
ROA (%)

236
236

7788.196

Tobin’s Q

236

BSIZE

232

ID (%)232

FEDIR (%)

232

INT (%)

236

OWNDIR (%)

236

FINVTR (%)

236

DEBT2TE

236

Total Asset (in million)

236

MinimumQ1

361.08MedianQ3

Maximum

5280

7836.187

10340.65

21606.09

SD3534.794

2.477707-20.52043

1.98769

2.917638

3.605306

7.782377

2.717383

1.135735

0.9243132

1.028214

1.068794

1.146552

5.779525

0.3422262

13.89655

5

11.5

14

15.5

27

4.255639

7.19215006.66667

10.55556

50

8.35619

11.47504

009.09091

16.66667

92.30769

11.87215

14.26262

0

5.6

13.46

20.42564.82

11.15091

19.76421

0

8.35

19.23

29.13557.15

13.64586

2.110751

0

0

0

0.24

37.42

6.29819

12.14761-16.72824

9.488538

11.34883

13.82555

230.9772

15.21685

97588.41

14302.8448328.74

81481.92

129086.2

549979.1

71731.33

Page 42 of 47

4. Table 4: Pearson Correlation Matrix
CEO Pay(NaturalLog )CEO Pay(Natural Log )ROA (%)
Tobin’s Q
BSIZE(Natural log)
ID (%)FEDIR (%)
INT (%)OWNDIR (%)
FINVTR (%)
DEBT2TETOTALASSET(Natural log)

ROA
(%)

Tobin’sQ

BSIZE(Natural
Log )

ID
(%)

FEDIR
(%)

INT
(%)

OWNDIR(%)

FINVTR(%)

DEBT2TE

TOTAL
ASSET
((NaturalLog )1.00000.17771.00000.0091
0.0428-0.13070.42691.0000-0.1458

0.3137-0.0672-0.07010.17720.0122-0.1169

0.17710.2051-0.0092-0.2082
0.2778-0.0202-0.1318-0.15540.08430.2276-0.0284-0.00240.0435-0.0568-0.1771

1.0000-0.2857-0.06420.08990.3663-0.1426-0.06020.27761.00000.03451.00000.0291

0.06131.0000-0.1200-0.1949-0.0250

1.00000.0465-0.0644-0.1874-0.0833

1.0000-0.0559
0.39500.02740.0193-0.1151
0.0363-0.1367-0.02270.02760.15141.00000.01061.0000Page 43 of 47

5. Table 5: Regression results of determinants of Total CEO Compensation Pay Level
ModelsExpectation
Constant
ROA(+)

Tobin’s Q(+)

LNBSIZE(+) / (-)

ID (%)(+)

FEDIR (%)(+)

INT (%)(+)

OWNDIR (%)(+) / (-)

FINVTR (%)(+)

DEBT2TE(-)

LNASSET(+)

R2
Observations(1)
11.86402(0.000)0.0984424(0.001)-0.4898989(0.003)0.01817765(0.000)0.01241966(0.000)0.0105272(0.012)0.0198539(0.000)0.0011338(0.841)-0.0078828(0.033)0.1652856(0.032)
0.3440232(2)11.26618(0.000)0.1722982(0.000)-0.0079231(0.961)
0.02132985(0.001)0.01250845(0.000)0.0100245(0.025)0.0122892(0.002)0.0061239(0.392)-0.0072397(0.118)0.1464764(0.092)0.2811232(3)11.28576(0.000)0.1000842(0.001)0.1968491(0.000)-0.4663235(0.005)0.01869196(0.000)0.01307439(0.000)0.0106131(0.011)0.019856(0.000)0.0007718(0.891)-0.0076373(0.049)0.176245(0.021)0.3536232

This table shows coefficients from the OLS regression of the total CEO remuneration which denotes : LNTCEOP- Natural
Logarithm of Total CEO Salary ; ROA (Return on Assets)- ROA is calculated by net profit before tax divided by average
total assets; Tobin’s Q- Tobin’s Q is computed by book value of total assets minus book value of total equity plus market
value of total equity divided by book value of total assets.; LNBSIZE- Natural Logarithm of total number of directors in theboard; ID- Percentage of Independent directors in a board. It is measured by number of independent directors in a board
divided by total number of directors; FEDIR- Percentage of Female directors in a board. It is computed by the number offemale directors divided by total number of directors in the board; INT- Percentage of ownership holds by Institution;
OWNDIR- Percentage of share ownership holds by all directors in a board. It is computed by number of shares owned bydirectors divided by the number of shares outstanding; FINVTR- Percentage of Ownership hold by Foreign Investors;
DEBT2TE- Book value of total debt divided by book value of total equity; LNASSET- Natural logarithm of book value of
total assets. Total asset is used as proxy of firm size. The standard errors and t statistics are not reported but t statist ics arecalculated using white’s (1980) heteroskedasticity-consistent standard error and only probability is presented in theparenthesis.

Page 44 of 47

6. Table 6: Regression Results of Determinants of Total CEO Compensation

Considering Lag Models
Expectation
Constant
ROA(-1)(%)(+)

Tobin’s Q (-1)(+)

LNBSIZE (-1)(+) / (-)

ID (-1) (%)(+)

FEDIR (-1) (%)(+)

INT (-1) (%)(+)

OWNDIR (-1) (%)(+) / (-)

FINVTR (-1) (%)(+)

DEBT2TE (-1)(-)

LNASSET(-1)(+)

R2
Observations(1)
12.89093(0.000)0.1028269(0.002)-0.4438799(0.004)0.01642275(0.005)0.01241046(0.000)0.0109003(0.013)0.0198697(0.000)0.0010074(0.872)-0.0081728(0.029)0.1239319(0.119)0.3238202(2)12.25081(0.000)0.1912672(0.001)0.0896344(0.568)0.02229148(0.006)0.01252239(0.000)0.0105454(0.026)0.0118014(0.004)0.0062225(0.415)-0.0073972(0.122)0.1010067(0.270)0.2493202(3)12.38806(0.000)0.1049082(0.001)0.2189509(0.002)-0.4225281(0.005)0.016758(0.004)0.0132995(0.000)0.0111124(0.011)0.0199876(0.000)0.0008009(0.896)-0.0079261(0.044)0.1307362(0.095)0.3377
202

This table shows coefficients from the OLS regression of the total CEO remuneration which denotes : LNTCEOP- Natural
Logarithm of Total CEO Salary ; ROA(-1) (Return on Assets)- ROA is calculated by net profit before tax divided byaverage total assets of previous year ; Tobin’s Q(-1)- Tobin’s Q is computed by book value of total assets minus book valueof total equity plus market value of total equity divided by book value of total assets of previous year; LNBSIZE(-1)Natural Logarithm of total number of directors in the board of previous year; ID(-1)- Percentage of Independent directors ina board. It is measured by number of independent directors in a board divided by total number of directors of previous year ;FEDIR(-1)- Percentage of Female directors in a board. It is computed by the number of female directors divided by total
number of directors in the board of previous year; INT(-1)- Percentage of ownership holds by Institution of previous year;
OWNDIR(-1)- Percentage of share ownership holds by all directors in a board. It is computed by number of shares owned
by directors divided by the number of shares outstanding of previous year ; FINVTR(-1)- Percentage of Ownership hold byForeign Investors of previous year; DEBT2TE(-1)- Book value of total debt divided by book value of total equity ofprevious year; LNASSET(-1)- Natural logarithm of book value of total assets of previous year. Total asset is used as proxyof firm size. The standard errors and t statistics are not reported but t statistics are calculated using white’s (1980)
heteroskedasticity-consistent standard error and only probability is presented in the parenthesis.

Page 45 of 47

7. Table 7: Regression results of determinants of Total CEO Compensation afterControlling Time
Expectation
Constant
ROA(+)

Tobin’s Q(+)

LNBSIZE(+) / (-)

ID (%)(+)

FEDIR (%)(+)

INT (%)(+)

OWNDIR (%)(+) / (-)

FINVTR (%)(+)

DEBT2TE(-)

LNASSET(+)

YEAR DUMMY
2007
2008
2009
2010
2011
2012
2013
R2
Observations(1)
21.09465(0.000)0.1197706(0.000)(2)
18.92545(0.000)-0.3903911(0.010)0.00600300(0.289)0.01525801(0.000)0.0089502(0.029)0.0122586(0.014)0.0127626(0.027)-0.0052209(0.182)-0.2339463(0.009)0.091157(0.231)0.1339432(0.426)0.0139838(0.063)0.01453051(0.000)0.0083193(0.060)0.0054725(0.240)0.016159(0.028)-0.004779(0.342)-0.1858036(0.086)(3)
20.47212(0.000)0.1231036(0.000)0.1675653(0.003)-0.3791303(0.012)0.00572910(0.308)0.01575941(0.000)0.0091475(0.025)0.0123154(0.013)0.0122979(0.034)-0.0052208(0.195)-0.2176079(0.016)0.1877547(0.148)0.3566903(0.016)
0.54816(0.000)0.696605(0.000)0.9944976(0.000)1.062317(0.000)1.195172(0.000)0.45192320.1557556(0.256)
0.3232475
0.025
0.4702736(0.002)
0.66331(0.000)0.8531098(0.000)0.8528993(0.000)0.9108525(0.001)0.35782320.1695097(0.192)
0.343093(0.021)
0.5290885(0.001)0.6201842(0.000)0.9696709(0.000)1.050409(0.000)1.186437(0.000)0.4579232

This table shows coefficients from the OLS regression of the total CEO remuneration which denotes : LNTCEOP- Natural
Logarithm of Total CEO Salary ; ROA (Return on Assets)- ROA is calculated by net profit before tax divided by average
total assets; Tobin’s Q- Tobin’s Q is computed by book value of total assets minus book value of total equity plus market
value of total equity divided by book value of total assets.; LNBSIZE- Natural Logarithm of total number of directors in theboard; ID- Percentage of Independent directors in a board. It is measured by number of independent directors in a board
divided by total number of directors; FEDIR- Percentage of Female directors in a board. It is computed by the number offemale directors divided by total number of directors in the board; INT- Percentage of ownership holds by Institution;
OWNDIR- Percentage of share ownership holds by all directors in a board. It is computed by number of shares owned bydirectors divided by the number of shares outstanding; FINVTR- Percentage of Ownership hold by Foreign Investors;
DEBT2TE- Book value of total debt divided by book value of total equity; LNASSET- Natural logarithm of book value of
total assets. Total asset is used as proxy of firm size. The standard errors and t statistics are not reported but t statistics arecalculated using white’s (1980) heteroskedasticity-consistent standard error and only probability is presented in theparenthesis.

Page 46 of 47

8.

Table 8: Regression Results of Determinants of Total CEO Compensation at
Lagged Models Considering the Time Dummy
Expectation
Constant
ROA(-1)(+)

Tobin’s Q (-1)(+)

LNBSIZE (-1)(+) / (-)

ID (-1) (%)(+)

FEDIR (-1) (%)(+)

INT (-1) (%)(+)

OWNDIR (-1) (%)(+) / (-)

FINVTR (-1) (%)(+)

DEBT2TE (-1)(-)

LNASSET(-1)(+)

YEAR DUMMY
2008
2009
2010
2011
2012
2013
R2
Observations(1)
21.7884(0.000)0.1173671(0.000)(2)
19.78558(0.000)-0.3400923(0.013)0.006287751(0.349)0.0151658(0.000)0.0089451(0.036)0.0125687(0.015)0.01174(0.066)-0.0054919(0.173)-0.262287(0.004)0.1155824(0.057)0.2158543(0.193)0.01555378(0.074)0.01451112(0.000)0.0086745(0.065)0.0051986(0.264)0.0155313(0.051)-0.0049449(0.341)-0.2256345(0.052)(3)
21.14297(0.000)0.1210267(0.000)0.1869313(0.008)-0.3306842(0.015)0.005950149(0.371)0.01584667(0.000)0.0092295(0.031)0.0127976(0.013)0.0112997(0.073)-0.005499(0.185)-0.2459471(0.007)

0.2765158(0.041)0.3591566(0.007)0.6246855(0.000)0.7065279(0.000)0.9641104(0.000)1.061337(0.000)0.4252202

0.2453228(0.086)0.3249367(0.013)0.5475389(0.000)0.6662885(0.000)0.8267997(0.000)0.8584186(0.001)0.3233202

0.2567288(0.057)0.3445476(0.011)0.6043866(0.000)0.622819(0.000)0.9385024(0.000)1.049464(0.000)0.4340202

This table shows coefficients from the OLS regression of the total CEO remuneration which denotes : LNTCEOP- Natural
Logarithm of Total CEO Salary ; ROA(-1) (Return on Assets)- ROA is calculated by net profit before tax divided byaverage total assets of previous year ; Tobin’s Q(-1)- Tobin’s Q is computed by book value of total assets minus book valueof total equity plus market value of total equity divided by book value of total assets of previous year; LNBSIZE(-1)Natural Logarithm of total number of directors in the board of previous year; ID(-1)- Percentage of Independent directors ina board. It is measured by number of independent directors in a board divided by total number of directors of previous year ;FEDIR(-1)- Percentage of Female directors in a board. It is computed by the number of female directors divided by total
number of directors in the board of previous year; INT(-1)- Percentage of ownership holds by Institution of previous year;
OWNDIR(-1)- Percentage of share ownership holds by all directors in a board. It is computed by number of shares owned
by directors divided by the number of shares outstanding of previous year ; FINVTR(-1)- Percentage of Ownership hold byForeign Investors of previous year; DEBT2TE(-1)- Book value of total debt divided by book value of total equity ofprevious year; LNASSET(-1)- Natural logarithm of book value of total assets of previous year. Total asset is used as proxyof firm size. The standard errors and t statistics are not reported but t statistics are calculated using white’s (1980)
heteroskedasticity-consistent standard error and only probability is presented in the parenthesis.

Page 47 of 47