Relationship between Directors' Remuneration and Financial Performance: Evidence from Government Linked Companies in Malaysia

Abstract

Government Linked Companies (GLCs) have been established in order to uphold the Malaysian spirit and contribute to the development of the economy. Board of Directors (BOD) is usually given the responsibility to look after the GLCs. But, sadly many of the times, these GLCs fail to perform as expected. Studies have been conducted to explore the relationship between BOD and firms performance. But, many of these studies have overlooked the matter of directors' remuneration which ultimate motivate directors to work for improving the financial performance of the companies.  Hence, the main objective of this study has been set up as to explore the relationship between directors' remuneration and firms' financial performance. For this study, sample has been chosen from the Malaysian GLCs. Data regarding directors' remuneration and firms' financial performance have been gathered using secondary data sources and the sampling period has been set as 2010 to 2014. Two regression models have been set up using the collected data.  For this study, directors' remuneration is chosen as independent variable and two dependent variable is firms' financial performance as measured by ROA and ROE. With these variables, two regression models have been set up. The collected data have been analysed using statistical tools.  From the analysis, it is evident that directors' remuneration influences firms' financial performance as measured by ROA and ROE. The two hypotheses proposed for this study have been accepted since significant positive relationship has been found between directors' remuneration and ROA and ROE.  It has been found that handsome remuneration package given to the directors is contributing in improving the return on assets ratio of the companies.  It has also been found that return on equity increases when directors are paid well.  This study is of utmost importance to all parties concerned since companies especially GLCs can improve their performance using the findings from this study.