Interactive Effects between Corporate Governance, Executive Compensation, and Firm Performance of the Manufacturing Industry in Indonesia

This study empirically investigates the interactive effect of executive compensation, firm performance, and corporate governance by adding aspects of monitoring and aligning incentives as suggested in agency theory. This study uses data of 51 manufacturing companies listed in the Indonesia Stock Exchange between 2014 and 2018. The data model used is dynamic panel data analyzed with System Generalized Method of Moments. The dynamic panel data model is used to describe relationships between dynamic variables, which can be seen from the existence of lag dependent variables between regressor variables. The study uses GMM approach to account for the problem of potential endogeneity and unobserved heterogeneity that arises due to the potential reverse causality. We found evidence of a significant positive reciprocal relationship between executive compensation and corporate governance. From the results of this study found that the reciprocal relationship lies in corporate governance, executive compensation, and company performance. This research is expected to have profound implications for corporate governance strategies and executive compensation to improve future firm performance. Our findings thus add several knowledges about executive compensation on an emerging market that uses the two-tier system, especially for policymakers and other stakeholders to make optimal governance systems.