IMPACT OF EXECUTIVE COMPENSATION ON RISK AND PERFORMANCE: AN EMPIRICAL ANALYSIS OF BANKS IN PAKISTAN

Abstract

As from last few years, executive compensation is a hot debate, it has been aired in electronic media, academic and practical research thus the study empirically investigates the interrelationship between executive compensation and performance, executive compensation and risk, in the emerging market, Pakistan. The study uses the panel data regression and VAR model analysis technique to examine the relationship between compensation, performance, and risk in a sample of Pakistani banks, using panel data for 20 banks from 2009 to 2019. To the best of our knowledge, this is one of the first studies examining the relationship between performance, risk and employee compensation using panel data approach in the context of Pakistan and using data for longer period. Three measures of performance return on assets return on equity, and operating profits and risk was measured by non-performing loan, and risk-weighted assets to test the impact of employee compensation on the performance and on risk of banks. Findings suggest that employee compensation has no significant impact on performance and risk of banks in Pakistan; this means in Pakistan higher employee’s compensation does not enable banks to improve their performance or enable banks to take more risk.