1 s2.0 S0020706309000193 Main

The International Journal of Accounting 44 (2009) 138 162
Executive performance-based remuneration,

performance change and board structures
Janet Lee
School of Accounting and Business Information Systems, The ANU College of Business and Economics,
The Australian National University, Canberra ACT 0200, Australia
Abstract
This paper examines CEO performance-based remuneration in companies that experience
improvement in financial performance but have different board structures. It analyzes how such
payment relates to change in financial performance and board structures by comparing the cases
between Australian and Singaporean companies. The results highlight that performance pay in both
countries is likely to be linked to change in performance. However, the proportion of CEO
performance-based payment in both countries does not seem to be related to board structure. Larger
firms in both countries appear to make great use of performance-based remuneration. Sales revenue
is likely to be used by companies in both countries as a yardstick for determining CEO performance
pay.
2009 University of Illinois. All rights reserved.
Keywords: Performance-based remuneration; Independent board; Performance change
1. Introduction
This paper examines performance-based compensation in companies that experience
improvement in financial performance but have different board structures. Specifically, it
analyzes the proportion of performance-based remuneration chief executive officers
(CEOs) receive to understand how such payment relates to changes in financial
performance and board structures. A comparison of remuneration and board practices in
Tel.: +61 2 6125 4336; fax: +61 2 6125 5005.
E-mail address: Janet.Lee@anu.edu.au.
0020-7063/$ - see front matter 2009 University of Illinois. All rights reserved.
doi:10.1016/j.intacc.2009.03.002
J. Lee / The International Journal of Accounting 44 (2009) 138162
139
Australian and Singaporean performance-improving companies, where the levels of

ownermanagement relationship and board governance are different, is made.
Corporate governance research originates from the issue of conflicts of interests between
management and shareholders, and directors' accountability to shareholders (Fama, 1980;
Fama & Jensen, 1983). The conflicts typically arise from the separation of management and
owners in widely held firms. Australian companies are relatively more widely held1 than
Singaporean companies and exhibit a higher level of owner-management conflicts;
companies in Singapore are largely family-owned or government controlled, and, therefore,
are expected to have a lower level of ownermanagement conflicts. The different owner
management relationships could lead to different board-monitoring systems in terms of
structure and composition in the two countries. Given global interest in and much media
attention paid to executive remuneration, what proportion of performance-based
compensation do companies pay to their chief executive when there is a change in
financial performance? Do regulators' recommendations for more independent boards
affect companies' decisions to structure management-incentive payments? Those two
issues are addressed in this paper.
Two competing views regarding the role of the board of directors and managementincentive payments prevail. Previous research, emphasizing the principalagent model of
governance (Core, Holthausen, & Larcker, 1999; Denis, 2001; Kakabadse, Kakabadse, &
Kouzmin, 2001; Rosenstein & Wyatt, 1990), considers the use of an independent board and
linking executive remuneration to performance to be good corporate governance practices.
An independent board has the capacity to monitor management performance to mitigate the
asymmetry of information between management and shareholders. Performance-based
executive remuneration is thus designed to align the interests of management and
shareholders. Proponents of the stewardship role of the board argue that executives should
have their own incentives to drive their firms' values rather than relying on an independent
board and short-term management-incentive payments (Donaldson & Davis, 1991). These
views could have implications on executive-performance pay under different owner
management settings.
Empirical evidence regarding the relationships among CEO compensation, sensitivity of
pay and performance, and board structure is mixed (e.g. Core et al., 1999; Denis, 2001;
Gillan & Starks, 2000; Kakabadse et al., 2001; Perry & Zenner, 2001; Rosenstein & Wyatt,
1990; Shleifer & Vishny, 1997). A strong link between executive payments, firm
performance and board structure is still questionable. Nevertheless, prior research provides
evidence of increasing levels of executive compensation and performance-based payment
over time in different countries (Bushman & Smith, 2001; Conyon & Schwalbach, 2000),
prompting an increase in research on performance-based management compensation. In
addition, there is a call for more research to better understand cross-country differences in
corporate governance (Bushman & Smith, 2001; La Porta, Lopez-de-Silanes, Shleifer, &
Vishny, 1998).
This study differs from prior research in that it focuses on the more controversial
component of performance-based payment rather than total remuneration. It examines how
1
While Australian companies are more widely-held than Singaporean companies, their ownerships are still
relatively more concentrated than companies in US and UK (La Porta, Lopez-de-Silanes, & Shleifer, 1999).
140
such payment relates to a change in financial performance rather than a single year of
performance. It also addresses whether an independent board affects the proportion of
performance-based remuneration CEOs receive by contrasting the practices in two
countries with different board-monitoring systems.
A comparison between Australia and Singapore is made because although these two
countries have different ownership and board environments they have similar governance
regulations imposed by capital market regulators, as a result of the global trend of
strengthening corporate governance regulation. This situation provides an appropriate
setting for analyzing the possible influence of ownership and board structure while
controlling for the effect of governance regulation on executive compensation.
A number of important findings arise from this study. First, performance-improving
companies in both countries are more likely to have a higher rate of CEO performancebased payment than performance-declining companies, suggesting that performance pay is
not only related to the level of performance as found in prior research, but also tends to link
to change in performance. Second, there are significant differences in ownership
concentration, board structure, and firm size, between the two countries. Among these,
CEO duality, firm size and CEO change account for the different proportions of
performance pay, signaling that a management-dominated board could affect the proportion
of performance pay in different countries. Third, when concentrating only on the sample
groups of performance-improving companies, both countries exhibit a similar proportion of
performance-based remuneration paid to CEOs despite the differences in the owner
management relationship and board structure, calling into question the need for greater
executive incentive payment in widely held firms that experience higher owner
management conflicts. Fourth, the lack of a significant relationship between board
structure and CEO performance-based remuneration in both countries highlights the
inapplicability of using the principalagent model and optimal compensation contracting to
explain CEO performance pay in Australia, but the competing view of the stewardship role
may hold in the Singaporean case. The possibility of management self-dealing behavior
may also be explored. Lastly, the study finds a significant relationship between the
proportion of performance pay and firm size in both countries, suggesting that larger firms
are likely to make greater use of performance-based payment. Sales revenue is also likely to
be used by companies as a yardstick for CEO performance pay as argued in prior research.
2. Institutional setting in Australia and Singapore
With the regulatory reforms in the early 2000s, various aspects of the accounting
regulatory environments in Australia and Singapore are becoming similar. Both Australia
and Singapore are common-law countries with established legal protection for outside
investors (La Porta et al., 1998). Both countries also have similar, high standards of
accounting regulations. Within Australia, company accounting practices are governed by
the Corporations Act 2001 and accounting standards issued by the Australian Accounting
Standards Board. The Corporations Act specifies company directors' duties, and requires
that financial statements be in compliance with the accounting standards and present a true
and fair view. The accounting standards thus have legal backing. Listed companies are also
required to comply with the Australian Stock Exchange listing rules and corporate
141
governance disclosure requirements. With the recent changes to the corporate law, which
aim to enhance the integrity of financial reports, company financial statements have to be
signed-off, not only by the directors, but also by the chief executive officer and the chief
financial officer, and there is also an emphasis on auditor independence and the use of an
audit committee (Corporate Law Economic Reform Program (Audit and Corporate
Disclosure) Act 2004).
In Singapore, company accounting and disclosure is regulated by the Companies Act
1994 (Chapter 50), administered by the Accounting and Corporate Regulatory Authority
(ACRA), and the Financial Reporting Standards issued by the Council on Corporate
Disclosure and Governance under the Ministry of Finance.2 ACRA was established in 2004
through a merger of the Registry of Companies and Business (which formerly administered
the Companies Act) and the Public Accountants Board. Similar to the Corporations Act in
Australia, the Companies Act in Singapore requires financial statements to comply with the
accounting standards and present a true and fair view. The Act also specifies directors'
responsibility for the preparation of financial statements and requires listed companies to
have an audit committee. Listed companies are also subject to the listing rules required by
the Singapore Stock Exchange.
With respect to governance regulation, as part of the regulatory response to recent corporate
failure, the Australian Stock Exchange (ASX) Corporate Governance Council was formed in
2002 to address and develop a national corporate governance framework. The Council
subsequently, in March 2003, recommended 10 principles of good corporate governance and
best practices.3 An if not, why not approach was adopted. Companies are required to provide
explanation for any departure from the best-practice recommendations. The recommendations
include the independence of the board and the setting up of board committees to enhance the
role and accountability of directors. The ASX codes also suggest linking executive
remuneration to company performance and maintaining a balance between fixed and incentive
pay. The codes encourage the use of performance-based payment, including those that are
equity-based, such as stock options (ASX Corporate Governance Council, 2003).
In Singapore, a similar response was initiated by the Singapore Ministry of Finance Corporate
Governance Committee, which issued the Code of Corporate Governance in 2001.4 Listed
companies are required to disclose their governance practices in their annual reports and to
provide explanations where their practices are not consistent with the Code (Singapore Ministry
of Finance Corporate Governance Committee, 2001). Similar to the ASX recommendations, the
Singaporean Code also suggests linking executive pay to performance. The use of a greater
proportion of performance-related elements of executive pay is encouraged. Where share
schemes, including share options, are used, they should be vested over a period of time. In this
respect, the Companies Act in Singapore has restricted the holding of share options for a period
of 10 years. The provisions in the Code are similar to the ASX recommendations in many
respects, except that the Singaporean Code recommends that at least one-third of the board
2
In 2007 the Accounting Standards Council was formed and took over the role of standards setting from the
Council on Corporate Disclosure and Governance.
3
The corporate governance recommendations were subsequently revised in 2007, but without major changes to
the substance of the corporate governance principles.
4
The Code of Corporate Governance was re-issued in 2005.
142
members be independent directors, while the ASX principles recommend that a majority of the
board of directors be independent, without specific guidance on what constitutes a majority.
Despite the similarity in regulatory environments, share ownership in Australian
companies is less concentrated than in Singaporean companies (La Porta et al., 1999)
because most Singaporean companies are primarily family or state owned. The different
ownership pattern is likely to affect the structure of the company board as a monitoring
mechanism (Donaldson & Davis, 1991).
3. Executive performance-based compensation
The issue of executive compensation has attracted much academic and media attention,
but not much is known about how different ownermanagement relationships affect
performance-based compensation to executive managers. A theoretical explanation
applicable to Anglo-American societies is typically provided by agency and contracting
theory. Agency problems within a firm arise from the conflict of interest between
management and shareholders/owners (Denis, 2001; Fama & Jensen, 1983; Fama, 1980). It
is argued that the degree of management and shareholders conflicts is potentially higher in
widely held firms, in which ownership is dispersed and is separated from the control of
capital resources (Fama & Jensen, 1983; La Porta et al., 1999). Such conflicts generally
arise from the management's motives to pursue their own interests at the expense of the
principals' interests in the presence of information asymmetry. Nevertheless, shareholders
may not have sufficient incentive to incur the high costs of monitoring management's
behavior. The use of management-incentive compensation contract and monitoring
management's opportunistic behavior is seen by the principalagent model as effective
mechanisms.
In order for the management compensation contract to be effective, previous research on
economic contracting theory emphasizes the potential trade-off between management
payment incentive and risk sharing in the design of an optimal compensation contract under
information asymmetry and uncertainty (Holmstrom, 1979; Ross, 1973; Shavell, 1979).
Where information asymmetry is high and the agent's effort is difficult to observe, as in the
case of widely held firms, the design of an optimal compensation contract will tend to
depend mainly on performance outcome in order to allocate the risk between the principal
and the agent (Shavell, 1979; Tosi, Werner, Katz, & Gomez-Mejia, 2000). It is also argued
that performance-linked compensation schemes are more important in market-oriented
systems and firms with more diversified ownership tend to have a higher degree of pay
performance sensitivity than firms with concentrated ownership under the principalagent
model (Kraft & Niederprum, 1999; Moerland, 1995). In that sense, it is reasonable to expect
that widely held firms that experience improvement in financial performance would have an
incentive to pay executive managers a higher proportion of performance-based
compensation.
This strong focus on the performance-based management compensation contract has
attracted a great deal of academic research on executive compensation and its sensitivity to
financial performance (Andjelkovic, Boyle, & McNoe, 2002; Baber, Janakiraman, & Kang,
1996; Conyon & Murphy, 2000; Core et al., 1999; Mishra, McConaughy, & Gobeli, 2000;
Thompson, 2005; Tosi et al., 2000; Tosi, Misangyi, Fanelli, Waldman, & Yammarino,
143
2004). Nevertheless, empirical results are mixed. Using a meta-analysis of CEOcompensation literature from a number of databases, Tosi et al. (2000) find no significant
relationship between executive pay and firm performance. On the other hand, Jensen and
Murphy (1990) document a significant positive relationship between top executive pay and
shareholders' wealth in the United States, but argue that the magnitude of the observed pay
and performance relationship is too small to provide an effective incentive. Their study
reflects that executive pay in the United States has not been efficiently based on
performance. They suggest that alternative political forces within and outside the firm, such
as the role of the board, the compensation subcommittee, and compensation disclosure
regulation, could play a role in influencing executive pay. Their conclusion appears to be
consistent with other research findings which seek to relate payperformance sensitivity to
different firm and regulatory environments. For example, Conyon and Murphy (2000)
show that payperformance sensitivity is higher in the United States than the United
Kingdom, possibly due to greater use of share options in the United States. Drawing from
Jensen and Murphy's (1990) sample, Mishra et al. (2000) find that for firms with higher
risk, increasing incentive pay beyond a certain level to compensate for risk actually exposes
CEOs to excessive risk, leading to lower firm performance. They attribute the results to
CEO risk-averse behavior. Baber et al. (1996) findings suggest the existence of payperformance sensitivity when investment opportunity is high. Kren and Kerr (1997) find a
strong linkage between compensation and firm performance where boards hold significant
shareholdings. However, no significant relationship is found between board independence
and firm performance. Core et al. (1999) examine 205 U.S. firms and find that CEO
compensation is higher for firms with CEO duality and bigger board size. Andjelkovic et al.
(2002) find that firms in New Zealand which voluntarily disclose CEO compensation
earlier than required exhibit a positive relationship between pay and performance. These
earlier studies highlight the potential effect of firm-level characteristics and country
differences on executive performance-based compensation.
4. Company board structure
The principalagent model attaches value to an independent board of directors in
monitoring management performance on behalf of the shareholders (De Andres, Azofra, &
Lopez, 2005; Fama, 1980). Characteristics of an effective, independent board normally
include the presence of outside independent directors on the board, and separating the role
of chief executive officer and the board chair in order to enhance monitoring (De Andres et
al., 2005; Denis, 2001; Kakabadse et al., 2001; Rosenstein & Wyatt, 1990; Ryan &
Wiggins, 2004; Wan & Ong, 2005). An independent board can make decisions on CEO
compensation more independently than management, and base them more objectively on
appropriate performance measures in line with the firms' values (Denis, 2001; Kren & Kerr,
1997), suggesting that there is some observable relationship between board composition
and paying performance-based compensation to executives. An effective board relies more
on incentive payment, which links to performance measures, to motivate management,
particularly when monitoring is difficult and managers are risk aversed (Mehran, 1995). An
alternative argument suggests that where board monitoring is effective in aligning
management interests and shareholder value to reduce agency problems, an independent
144
board can be seen as a substitute governance mechanism for management-incentive

alignment, thus reducing the need for performance-based payment (e.g. Coulton & Taylor,
2002; Ozkan, 2007).
Despite the benefit of an independent board in contracting executive-performance pay,
Shleifer and Vishny (1997, p.745) suggest that a serious problem associated with incentive
contracts is that they might create opportunities for self-dealing for the managers,
especially if these contracts are negotiated with poorly motivated boards of directors.
Similarly, Bebchuk, Fried, and Walker (2002) argue that managers with significant power
are often in a position to extract rent and maximize their compensation at the expense of
shareholders. Thus, for example, managers may negotiate advantageous contracts for
themselves when they expect that earnings are likely to increase. This may imply that firms
with less stringent governance control, including less independent board monitoring, are
more likely to be exposed to management self-dealing behavior.
The principalagent model has been challenged by proponents of the stewardship role of
the board (Donaldson & Davis, 1991; Lin, 2005). Typically the stewardship role is
dominant in firms with high ownership concentration, particularly where controlling
ownership by the founder and related family members serves as an important motivation for
improving firm performance, thereby reducing the agency problems between management
and the owners. This theoretical argument focuses on senior managers who effectively have
the incentive to act in the interests of the firm, rather than being maintained by self-interest
or opportunistic behavior. In such cases, the achievement of superior performance is made
possible by empowering the senior manager. Therefore, the concentration of CEO and
board chair responsibilities in the same person, and using inside directors, with their
experience, can arguably add value to the firm. Contrary to the agency perspective, with the
stewardship role and management self-incentive, performance-based payment for incentive
alignment is less important, implying that board structure is unlikely to have an important
effect on performance-based payment to the chief executive.
Ownership concentration is comparatively higher in Singapore than Australia.
Singaporean companies often exhibit lower separation of ownership and control. In
order to maintain family ownership and control, family members in Singaporean companies
generally hold substantial shareholdings and key positions. Managers are often family
members, appointed internally, and there are fewer independent directors on the board (Mak
& Kusnadi, 2005; Yeung & Soh, 2000). Performance-based payment could be viewed as a
reward to signal management's power (Lin, 2005), and there is no clear evidence about the
effect of equity-based remuneration on firm performance.5 The higher ownership
concentration and less independent-board structure could also potentially provide greater
opportunity for management self-dealing behavior.
Prior research does not provide clear evidence on the relationship between board
structure and executive performance-based remuneration. For example, Core et al. (1999)
5
Prior research argue that the incentive effect of stock options in Singapore is weak given the legislative
restriction on granting stock options to controlling shareholders and the limit on the amount of options that can be
awarded (Yeo, Chen, Ho, & Lee, 1999; Ding & Sun, 2001). However, research findings on the effect of stock
options on firm performance in Singapore are mixed. Yeo et al. (1999) do not find significant superior stock
performance for firms using stock options. On the other hand, Ding and Sun (2001) find a positive relationship
between stock price and stock-option plan announcements.
145
find CEO compensation is higher in U.S. firms where governance structure is less effective,
and there are fewer independent, outside directors. However, Kren and Kerr (1997) do not
find evidence that more outside directors on the board contributes to a greater pay
performance relationship. Coulton and Taylor (2002) also find no significant relationship
between an effective governance structure, including an independent board, and CEO
bonus and stock options pay in the Australian context.
Attention is also paid to the role of a remuneration subcommittee. Both the ASX
corporate governance principles and the Singaporean Codes support the use of an
independent remuneration committee to review and recommend executive compensation.
But the ASX acknowledges that such a committee may be more effective for larger firms
than smaller ones. The importance of the remuneration committee is also supported by
Dalton, Dailly, Ellstrand, and Johnson (1998) and Anderson and Bizjak (2003). But Dalton
et al. (1998) argue that the amount of CEO compensation is related to the composition of a
remuneration subcommittee. Anderson and Bizjak (2003), while considering the value of a
remuneration committee, do not find evidence that greater committee independence affects
executive remuneration in the U.S. context.
5. Variables
The study compares six sets of variables as they apply to Australian and Singaporean
companies. These are: CEO remuneration, financial performance, ownership concentration,
board independence, management-dominated control, and other board and firm attributes.
Using factor analysis for the entire sample, nine ownership and board variables fall into
three factors with eigen value greater than one, accounting for 74% of the variance. The
three factors are: (1) ownership concentration, based on three ownership measures; (2)
board independence, measured by the percent of independent directors and non-executive
directors on company boards and remuneration committees; and (3) managementdominated control, measured by CEO duality and directors shareholding. The nine
variables are classified into these three categories accordingly. The analysis can be
expressed in a general function as below and the variable measurement is summarized in
Table 1.
CEO performancebased remuneration = f financial performance; ownership
concentration; board and subcommittee composition; other board and firm atrributes
5.1. CEO remuneration
CEO performance-based remuneration is calculated by the total of bonuses and equitybased payment as a percentage of total remuneration. In Australia, the ASX Corporate
Governance Council recommends that listed companies disclose the amount and
components of remuneration for each director and each of the five highest-paid executives.
The disclosure should include components such as salary, fees, bonuses, profit share, value
of shares issued and options granted, and other noncash benefits. Although the ASX
guidelines were not yet effective in 2003, most companies had already made the transition
146
Table 1
Variable measurement.
Variables
Measurement
CEO remuneration
CEO performance-based remuneration Total bonuses and equity-based payments as a percentage of total
remuneration
Financial performance
Change in ROE in two years
Change in ROE in one year
Percentage change in ROE from 2001 to 2003

Percentage change in ROE from 2002 to 2003
Ownership concentration
Substantial shareholders
Largest shareholder
Top 20 shareholders
Percentage of shares held by shareholders with 5% or more shareholdings

Percentage of shares held by the top shareholder
Percentage of shares held by top 20 shareholders
Board independence
Independent directors on company
board
Non-executive directors on company
board
Independent directors on remuneration
committee
Non-executive directors on
remuneration committee
Number of independent directors as a percentage of total board

members
Number of non-executive directors as a percentage of total board
members
Number of independent directors as a percentage of total remuneration
committee members
Number of non-executive directors as a percentage of total
remuneration committee members
Management-dominated control
CEO duality
Directors shareholding
Other board and firm attributes

Firm size
Revenue growth
Asset growth
Board size
CEO change
Existence of remuneration committee
One if CEO and board chair is the same person, zero otherwise
Number of company ordinary shares held by directors as a percentage
of total shares issued
Total operating revenue

Percentage change in total operating revenue from 2001 to 2003
Percentage change in total assets from 2001 to 2003
Total number of directors on company board
One if there is a change of CEO during 2003, zero otherwise
One if a remuneration committee exists, zero otherwise
in disclosing details of executive payments. Within the Australian sample, many companies
use performance-based payment for creating shareholders' value as well as for retaining
key executives. Remuneration policies and packages for directors and the CEO are
normally designed and reviewed by the remuneration committee, which consists of a high
proportion of independent directors. The functions of the remuneration committee are
generally disclosed in the corporate governance section of the company's annual report.
The remuneration package of the sample firms typically includes a fixed salary component,
a variable or incentive component, superannuation and other benefits. The variable
component comprises a short-term incentive payment, which is largely paid as a cash
bonus, and a long-term incentive payment including share options or other forms of sharebased payments. Most companies link the incentive payment component to various
147
performance measures such as return on equity, profit, earnings per share, or total
shareholder return.
Singaporean companies are required by the Code to disclose details of the remuneration of
each director and the top five key executives in the annual reports. However, instead of a dollar
amount, companies are only required to use a percentage to disclose the base salary, variable or
performance-related income/bonuses, benefits in kind, stock options, and other long-term
incentives. The disclosure of a dollar amount is limited to bands of $250,000. Through
disclosure in the annual reports, many Singaporean firms portray performance pay as a
mechanism to motivate managers to increase the firm's value and to retain key management.
Nearly all firms in the Singaporean sample have remuneration committees that review
remuneration matters. Approximately two-thirds of the committee members are independent
directors, which is a lower proportion as compared to the Australian sample. Interestingly, many
firms also have a special committee to review the award of share options to management. While
most of the committee members are directors who are not eligible for share options, some firms
allow the CEO to be a member of this committee even though the CEO is also entitled to share
options. This appears to compromise the objective review of CEO performance pay.
Remuneration for the CEO in this sample of Singaporean firms typically includes a base salary,
a variable component, and other benefits. The variable component comprises mainly bonuses,
some also include share options. Although the variable component is regarded as performancerelated, the basis on which management performance will be measured is not reported.
Subject to the availability of data and the different classification of payments, performancebased remuneration for this study consists of items identified as performance-related in the
annual reports, including bonuses, variable components, long-term incentives, profit shares
and stock options. The Australian sample firms disclose the valuation of stock options,
commonly using the BlackScholes option-pricing model or binomial option-pricing model.
The value of stock options for the Australian sample is taken as the amount disclosed by the
firms. The Singaporean sample firms do not disclose the value of stock options. Where options
have been granted to the CEO, estimation is made using 25% of the exercise price. This
method of estimation was adopted by prior research (Core et al., 1999; Coulton & Taylor,
2002).6 On the assumption that the CEO receives the top band salary level, an adjustment is
then made to the percentage of the variable component as disclosed by firms. The analysis is
made in percentage terms, only, due to data restrictions in Singaporean disclosures.
5.2. Financial performance
The degree of change in return on equity during the prior two years (20012003), and
the immediate previous year (20022003) for each group is compared. Accounting-based
6
Core et al. (1999) acknowledges the imprecision of measuring long-term incentive components and employs
the estimation technique of 25% of the exercise price following prior simulation findings (e.g. Lambert, Larcker,
& Verrecchia, 1991) that both the 25% estimation and the more sophisticated option-pricing models normally
produce similar values. Using a sample of Australian firms, Coulton and Taylor (2002) also find that option
values estimated by the same technique are significantly correlated to the values disclosed by the firms. In this
study, even though a more sophisticated valuation method is used, the value of the stock option as a percentage of
total remuneration still cannot be estimated precisely because the disclosure does not include the dollar value of
the total remuneration.
148
financial measures are used because research has shown that such measures best reflect the
outcomes of a firm's internal control and management decisions, compared to market-based
measures, that are subject to influences external to the firm's control. It is also suggested
that accounting information is often used by the board of directors in incentive contracts
(Bushman & Smith, 2001; Hutchinson & Gul, 2003).7
5.3. Ownership concentration
Three measures of ownership concentration are used as an indication of the potential
level of owner-management conflicts in the two countries. These are: percentage of shares
held by shareholders with 5% or more of the company shares, percentage of shares held by
the top shareholder, and percentage of shares held by the top 20 shareholders.
5.4. Board independence
The independence of the board is represented by the level of independent directors and
non-executive directors on the company board and the remuneration committee. This
mechanism is seen as effective by the principalagent governance model. The proportion of
independent directors on the company board is measured by the number of independent
directors as a percentage of the total company board members. Similar measurement applies
to the proportion of independent directors on the remuneration committee, the proportion of
non-executive directors on the company board and the proportion of non-executive
directors on the remuneration committee.
5.5. Management-dominated control
Two proxies for management control are employed: CEO duality and directors
shareholding. This set of variables represents the level of authority and power that can be
exercised by directors and the CEO, which is seen as necessary to fulfil the stewardship role
of management. CEO duality is measured as 1 if CEO and board chair is the same person
and 0 otherwise. Directors' shareholding is the number of company ordinary shares held
by directors as a percentage of total shares issued.
5.6. Other board and firm attributes
The analysis controls for the possible influence of other board and firm attributes on
executive pay, including firm size, revenue growth, asset growth, board size and change of
CEO. Pay and performance sensitivity is often found to be associated with larger firms or
firms with growth opportunity (Anderson & Bizjak, 2003; Baber et al., 1996; Coulton &
Taylor, 2002; Murphy, 1985; Thompson, 2005). It is argued that the organizational
7
Return on equity (ROE) is used rather than return on assets (ROA) in the analysis. While both measures are
commonly employed by various studies (Donaldson & Davis, 1991; Core et al., 1999; Hutchinson & Gul, 2003),
the two measures are often highly correlated and produce similar results (Hutchinson & Gul, 2003).
149
complexity of larger firms requires greater management effort and, therefore, higher
executive compensation (e.g., Andjelkovic et al., 2002; Coulton & Taylor, 2002; Newman
& Bannister, 1998). This suggests a greater need for incentive for risk sharing under
uncertainty. Thompson (2005) suggested that sales and sales growth are common indicators
for making executive-remuneration decisions. Firm size is measured by total operating
revenue, which also captures the suggestion that companies may use sales revenue as a
yardstick for determining executive pay. Asset growth is measured as the percentage
change in total assets during the previous two years (Beasley, 1996). A similar measure is
computed for revenue growth. Prior studies find a negative relationship between board size
and firm value (De Andres et al., 2005; Mak & Kusnadi, 2005). Following this reasoning,
smaller boards, which are likely to be associated with better performance, are expected to
design higher performance-based payment (Denis, 2001). In addition, CEO pay may also
be contingent upon the appointment of a new CEO (Rose & Shepard, 1997). CEO change is
coded as 1 if there is a change in CEO during 2003, otherwise 0.
6. Sample
The sample comprises 47 performance-improving companies and 19 declining
companies in Australia, as well as 52 performance-improving companies and 32 declining
companies in Singapore, with a total of 150 firms. Table 2 presents the sampling process.
Drawing on Bruton, Oviatt and White's (1994) and Castrogiovanni and Bruton's (2000)
studies which define financially-distressed firms as those that experience two consecutive
years of decline in both net income and investment return, this study applies the same
criterion to identify companies experiencing declining performance. Similarly, companies
experiencing two consecutive years of increase in both net income and investment return
are identified as performance-improving. Given the mixed findings in prior research
regarding the relationship between executive pay and firm performance, the emphasis on a
comparison between a group of performance-improving companies and a group of
performance-declining companies provides the opportunity to specifically investigate
performance pay patterns between two distinct groups, particularly when the pay
performance relationship may not be linear. The sample-selection approach used in this
Table 2
Research sample.
Australia
Initial sample satisfying performance criteria

Less: firms with three consecutive years of
negative net income and return on equity
Less: firms for which annual reports cannot be
located
Less: firms with missing governance information
Final sample
Singapore
Performance
improving
Performance
declining
Performance
improving
Performance
declining
87
2
27
n/a
82
11
39
n/a
10
33
47
7
19
9
52
4
32
150
Table 3
Industry distribution of sample firms.
Sector a
Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Health care
Financials
Information technology
Telecommunication services
Utilities
Total number of firms
Number of firms
Au-I
Sg-I
Au-D
2
6
12
8
3
3
9
1
2
4
13
14
1
2
10
6
2
9
3
47
52
2
3
1
1
1
19
Sg-D
2
11
6
3
9
1
32
Au-I Australian performance-improving companies.

Sg-I Singaporean performance-improving companies.
Au-D Australian performance-declining companies.
Sg-D Singaporean performance-declining companies.
a
Firms are classified on the basis of Global Industry Classification Standards (GICS).
study allows the analysis to focus on companies with genuine rather than temporary
performance change (Bruton et al., 1994).
Using the Osiris research database,8 the top 500 companies in Australia and Singapore
with data on net income and return on equity from 2001 to 2003 were identified. The
selection process generated 235 firms which satisfied the performance criteria.
Performance-improving firms with three consecutive years of negative net income and
investment return were eliminated as these firms are most likely to be in financial distress,
which could have an impact on management remuneration design (Beatty & Zajac, 1994;
Mishra et al., 2000), thus producing a bias in the analysis of results.9 The final sample of
150 was obtained after eliminating those companies for which annual reports or corporate
governance data were not available. For each company, data relating to CEO performancebased remuneration, board structure, ownership concentration, industry, and other firm
attributes for the year 2003 were collected using research databases including Osirus,
Connect4, and Aspect,10 as well as company annual reports.
The sample firms operate in a range of industries. Many of them are multinational
companies. Table 3 presents the industry distribution of the sample firms in both countries.
Firms are classified on the basis of the Global Industry Classification Standard (GICS),
which includes 10 broad industry sectors, with further classification of industry subgroups
8
Osirus is a database containing company data in different countries.

Screening the data of those performance-improving companies with three consecutive years of negative
financial results revealed that these companies exhibited the characteristics of declining firms, with similar low
proportion of performance-based payment as the performance-declining companies in both countries. Their
inclusion in the sample is likely to have produced a bias in the analysis of results.
10
Connect4 and Aspect are Australian company databases.
9
151
Table 4
Ownership concentration, board and firm attributes.
Au-I
Ownership concentration
Substantial shareholders (5% or more
shareholdings)
Largest shareholder
Sg-I
Sig
Au-D
Sg-D
Sig
Mean
SD
Mean
SD
Mean
SD
36.19
23.363
20.48
19.704
58.58
19.605
58.43 0.000
15.761
34.59 0.000
20.611
78.63 0.000
10.322
33.79
28.244
20.17
19.866
54.79
24.593
64.33 0.000
14.186
40.34 0.000
17.546
82.90 0.000
8.726
Board independence
Independent directors on company board Mean
SD
Non-executive directors on company
Mean
board
SD
Independent directors on remuneration
Mean
committee
SD
Non-executive directors on remuneration Mean
committee
SD
62.30
23.282
74.13
17.817
81.05
27.717
89.66
22.446
45.68
12.001
59.34
15.124
69.43
12.106
77.77
15.162
0.000
52.82
19.467
70.60
14.044
71.11
24.795
81.11
21.193
44.20
11.200
59.70
13.570
65.89
13.171
75.05
20.362
1
2.1
8.47
14.507
24
0.000#
46.2
20.81 0.000
23.243
Top 20 shareholders
Management control
CEO duality
Other board and firm attributes

Firm size (US $m)
Revenue growth
Asset growth
Board size (No.)
CEO change
Existence of remuneration committee
No.
%
Mean
SD
Mean 1703.7
239.1
SD
3741.1
465.4
Mean
38.99
21.69
SD
31.338 29.673
Mean
24.65
17.69
SD
15.851 18.531
Mean
7.13
7.12
SD
2.163
1.688
No.
7
5
%
14.9
9.6
No.
40
50
%
85.1
96.2
0.000
0.000
0.000
0.000
0.001
0.007
0.762
0.422
0.056#
1
5.3
2.76
4.480
0.055
0.013
0.547
0.564
10
0.029#
31.3
21.36 0.002
23.496
152.0
75.2
300.6
96.311
70.43
7.41
140.182 22.165
30.79
2.15
51.306 14.099
5.21
7.22
1.548
1.862
5
2
26.3
6.3
14
32
73.7
100.0
0.134
0.006
0.003
0.000
0.044#
0.002#

Sig Two-group comparison significance level by MannWhitney two sample test.
# Pearson chi-square significance.
Significance at 0.1 level.
Significance at less than 0.01 level.
within each sector. In both countries, performance-improving firms appear to be

concentrated in three industry sectors: industrial, consumer discretionary, and financials.
While most Singaporean declining firms are in the industrial and information technology
152
sectors, Australian declining firms are distributed across most sectors. The ownership and
governance characteristics of the sample firms are discussed in the Results section.
7. Results
Three levels of analysis were conducted. Initially, the sample characteristics of
ownership concentration, board, and firm attributes for performance-improving companies
in the two countries were compared and contrasted to the performance-declining companies
in the two countries. Similar analysis was then applied to compare the proportion of CEO
performance-based remuneration between the two countries. Finally, factors which might
influence the proportion of performance-based remuneration were analyzed. A regression
was estimated for the whole sample to identify any country effect. Then, two-stage least
square regression was estimated for performance-improving companies in each country to
provide further within-country evidence.
7.1. Sample characteristics: Ownership concentration, board structure and firm attributes
Differences in ownership concentration, board structures and firm attributes between
companies in Australia and Singapore are presented in Table 4, which shows that the
sample Singaporean companies have a higher ownership concentration than the Australian
companies. The differences are statistically significant for all three measures. The
shareholdings by the largest shareholder in Australia has a mean of about 20% for both
improving and declining companies, while the mean for Singaporean improving companies
is 35% and 40% for declining companies. In Australia, shareholders with 5% or more
shareholdings, on average, hold 36% of shares for improving companies and 34% for
declining companies, but a much higher percentage is found in Singapore (a mean of 58%
for improving companies and 64% for declining companies). Similarly, for the mean
percentage of shares held by the top 20 shareholders, a higher percentage is noted in
Singapore (79% for improving companies and 83% for declining companies) compared to
the percentages in Australia (59% for improving companies and 55% for declining
companies). The higher ownership concentration in Singapore is not surprising as family
ownership is common. Approximately one-third of the Singapore sample firms have
family-related ownership, while only a couple of firms in the Australian sample have family
ownership (data not reported in table).
The results on the level of board independence and management-dominated control
reveal different corporate governance practices between Australian and Singaporean
companies. Australian companies with improving performance are likely to structure a
more independent board, but performance-improving companies in Singapore tend to
empower senior management with greater authority and control. Similar results are found
for performance-declining companies. In relation to board independence, Australian
improving companies have a higher proportion of non-executive and independent directors
on the board and remuneration committee (mean 74% and 62%, respectively, on the board;
89% and 81% for those with a remuneration committee) than their Singaporean
counterparts (board, 59% and 46%; remuneration committee, 78%, 69%). On the other
hand, a higher proportion of Singaporean improving companies (46%), as compared to
153
Australian (2%), have the roles of board chair and CEO served by the same person.
Singaporean companies also exhibit a higher level of director shareholdings than Australian
companies (mean, 21% and 8%, respectively). The results are similar for performancedeclining companies.
The results suggest that there is likely to be a substitution effect between ownership
concentration and the need to structure an independent board for the sample companies.
This proposition is supported by an additional statistical test (not reported here) which
shows a significant negative correlation between the proportion of independent directors
and the three ownership measures.11 This highlights that in an environment where
ownership concentration is high (possibly with a high level of family ownership), as in the
case of Singaporean companies, companies are less likely to be concerned about board
structure or bringing in more independent directors. There are two competing arguments
regarding such relationships. It can be argued that large investors have an incentive and the
ability to monitor the operation of the firm due to their significant shareholdings, therefore,
reducing agency problems (Denis, 2001; Shleifer & Vishny, 1997). The involvement of
large investors in the monitoring process becomes an important corporate governance
mechanism. This view is also consistent with the proponents of the stewardship role of the
board (Donaldson & Davis, 1991). The second argument suggests that large investors enjoy
private benefits at the expense of other shareholders (Denis, 2001) and, thus, have less
incentive to structure an independent board.
Other board and firm attributes are also different between the two countries. Australian
improving companies tend to be larger firms, in terms of total revenue, compared to
Singaporean improving companies. Declining firms in both countries tend to be much
smaller firms. Australian companies, both improving and declining, have higher assets and
revenue growth than Singaporean companies. Both Australian and Singaporean improving
companies have similar board size, but Australian declining companies have smaller board
size than declining companies in Singapore. A higher proportion of both Australian
improving and declining companies experience a change of CEO as compared to
Singaporean companies. It appears that change in CEO is not common in Singapore even
though firm performance declines. This perhaps relates to the different corporate culture
and ownership type in the two countries. It may be difficult to change a CEO who is a
family member of the family-owned company in Singapore.
7.2. CEO performance-based remuneration
Details of CEO remuneration and financial performance are presented in Table 5. Panel
A shows that companies with improving financial performance experience a similar level of
changes in ROE from 2001 to 2003 in both Australia (mean 17%) and Singapore (mean
19%). Much weaker growth in ROE is observed from 2002 to 2003 (mean 4% in Australia
11
A regression analysis of the proportion of independent directors is also conducted on the percentage of shares
held by holders with 5% or more shareholdings, and other control variables including firm size, revenue growth,
debt and board size for the whole sample in two countries. The results confirm a negative association between
board independence and ownership concentration (adjusted R2 0.281, sig 0.000).
154
Table 5
Financial performance and CEO remuneration.
Au-I
Sg-I
Sig
Au-D
Sg-D
Sig
Panel A: Financial performance

Change in ROE in two years (2001 to 2003) Mean 16.75 18.71 0.911 67.20 27.92 0.034
SD
25.991 23.763
70.983
30.645
Change in ROE in one year (20022003)
Mean 4.17
6.80 0.236 48.83 16.67 0.037
SD
3.572 7.402
60.411
21.810
Panel B: CEO remuneration (% of total remuneration)
CEO performance-based remuneration
Mean 29.78
(all sample)
SD
22.109
Firms with performance-based component
No.
41
%
87.23
CEO performance-based remuneration (only Mean 34.15
those with performance-based pay)
SD
20.237
Fixed salary
Mean 57.97
SD
19.269
Other (benefits and superannuation)
Mean 12.24
SD
13.243
32.42
23.903
48
92.30
35.12
22.870
59.90
22.872
9.91
11.136
0.649
13.06
18.869
9
47.36
27.57
18.732
71.43
23.698
15.43
20.161
13.04
12.487
24
75.00
17.38
11.458
75.99
18.142
13.49
14.368
0.319

Sig Two-group comparison significance level by MannWhitney two sample test.
The MannWhitney test shows there is a significant difference in CEO performance-based remuneration (all
sample) between Au-I and Au-D (p = 0.002), and a significant difference between Sg-I and Sg-D (p = 0.000).
and 7% in Singapore). Companies with declining financial performance, however,

experience a steep drop in ROE over the two-year period from 2001 to 2003 (mean 67%
in Australia and 28% in Singapore). The decline in ROE for the one-year period from
20022003 is about 49% in Australia and 17% in Singapore.
Panel B presents information on CEO remuneration. The proportion of CEO performancebased remuneration is similar for both Australian and Singaporean improving companies
(mean 30% and 32%, respectively, showing no significant statistical difference). The low
proportion of CEO performance-based payment for declining companies is also similar in both
countries (mean 13% for both Australia and Singapore, showing no significant statistical
difference). The results also reveal that 87% of Australian and 92% of Singaporean improving
firms in the sample pay a performance-based component to CEOs. This contrasts to only 47%
of Australian and 75% of Singaporean declining firms. For those with a performance
component, the proportion of performance-based payment is similar for improving firms in
both countries (mean 34% in Australia and 35% in Singapore). But declining firms pay a much
lower proportion (mean 27% in Australia, 17% in Singapore). The results also highlight that
there is a wider gap in the proportion of performance pay between performance improving and
declining companies in Singapore than in Australian. In other words, in Singapore, when the
firm's performance is improving, the performance pay proportion is much higher, and when
the firm's performance is declining, the performance pay proportion is much lower.
155
The findings are consistent with the expectation that firms with improving performance
will exhibit a higher proportion of executive performance-based payment than declining
firms (with significant differences between performance-improving firms and performancedeclining firms in each country). In addition, a higher proportion of the improving firms
than the declining firms pay a performance-based component to the CEO, and for those
paying a performance component, improving firms pay a higher proportion than declining
firms. This indicates that performance pay is responsive to changes in performance.
However, given the differences in ownership and board structures between the two
countries, the similar proportion of performance-based payment for improving firms in the
samples from each country raises queries about whether ownership and board structures
matter when designing CEO pay.
7.3. Determinants of CEO performance-based remuneration
The association between CEO performance-based payment and other ownership, board
and firm attributes is tested by multivariate analysis. Initially, a regression is estimated for
the whole sample (combined improving and declining firms in both countries) to test the
effect of country differences of ownership and board structures on performance-based
remuneration. The independent variables consist of ownership and board variables,
including the percentage of shares held by shareholders with 5% or more shareholdings, the
proportion of independent directors on the board, and the proportion of independent
directors on the remuneration committee; and other variables which show significant
country differences as shown in Table 4, including CEO duality, director shareholding, and
total revenue (the logarithm of total revenue is used in the regression analysis). The
estimation also controls for improving or declining firms (coded as 1 for improving firms,
0 otherwise) and CEO change.12
The results are presented in Table 6. Diagnosis by the variance inflation factor indicates
there is no significant collinearity problem. A significant, positive relationship is found
between the performance component and improving/declining firms, CEO/chair duality,
and total revenue. A significant, negative relationship is found for the CEO change variable.
However, the coefficients of ownership and independent director variables are not
statistically significant. The results suggest that ownership concentration, an independent
board, or an independent remuneration committee do not appear to have an effect on the
decision to pay a performance component to the CEO. Instead, differences in managementdominated control through CEO duality and firm size are likely to drive the proportion of
performance pay as expected. The appointment of a new CEO tends to reduce performance
pay. The results also provide evidence that performance-based payment is sensitive to
improvement in financial performance when the change in performance is analyzed as a
dichotomous category.
The whole-sample analysis provides evidence on country effect. But are there any
different driving factors within each country? To examine this issue, I conduct two separate
12
Only selected control variables are included in the regression estimation due to collinearity problem. For
example, board size is highly correlated with total revenue (0.528, p = 0.000); and total revenue is highly
correlated with total assets (0.770, p = 0.000).
156
Table 6
Regression analysis of CEO performance-based remuneration whole sample between countries.
Intercept
Substantial shareholders
Independent directors on company board
Independent directors on remuneration committee
CEO duality
Ln total revenue
Performance improving/declining
CEO change
Coefficient
p-value
0.036
0.064
0.034
0.155
0.051
0.410
0.207
0.181
0.006
0.681
0.531
0.711
0.057
0.545
0.000
0.017
0.020
F-statistic
R-square
Adj. R-square
Sig.
7.746
0.333
0.290
0.000
Significance at 0.1 level.

regression analyses for performance-improving firms in each of the two countries. Due to
collinearity13 and sample-size problems, only selected variables are tested. The degree of
improvement in ROE one year prior to performance pay and board structure variables are of
interest. The expected relationship can be expressed in the following general function.
CEO performanceQbased remuneration = f degree of improvement in ROE; board
structure variables; control variables
The board variables include proportion of independent directors on the board, CEO
duality, and an interactive variable representing the level of board independence in growing
firms (proportion of independent directors on the board x revenue growth). The control
variables include total revenue and CEO change.
A potential issue in this regression analysis is the endogenous relationship between the
proportion of performance pay and the improvement in ROE. While a company's decision
on performance pay may be based on improvement in financial performance, the
performance pay is also a management-incentive mechanism designed to enhance company
financial performance. A two-stage least squares analysis is employed to address this issue
of potential endogeneity. In the first-stage regression, the ROE variable is estimated as
follow.
Degree of improvement in ROE = f boardQstructure variables; risk factor; control variables
The same board-structure variables and control variables are used. A new variable, the
risk factor, is added to satisfy the two-stage estimation identification requirement.
13
Only selected control variables are included due to collinearity problem. For example, the Australian sample
showed a high correlation between board size and total revenue (0.700, p = 0.000); and between total revenue and
total assets (0.823, p = 0.000).
157
Consistent with Core et al. (1999), risk is expected to be an important factor influencing
firm performance, and is measured by the standard deviation of ROE for the previous three
years.
A predicted value of the degree of improvement in ROE is obtained from the first-stage
regression. This predicted value is used in the second-stage regression to estimate the
relationship between the proportion of performance pay and the degree of performance
improvement.
Table 7 provides the regression results. For Australian improving companies, there is no
significant relationship between CEO performance-based payment and the degree of the
previous year's improvement in financial performance, nor any significant relationship
between performance pay and board structure. However, the proportion of performance pay
is significantly and positively associated with total revenue. With respect to the
Singaporean improving companies, the only significant variables are total revenue (with
a positive coefficient) and CEO change (with a negative coefficient). Other board and
performance variables are not statistically significant.
The study does not find that independent directors influence CEO performance-based
payment. This holds true whether a firm ownership is widely held or concentrated. Together
with the analysis in the previous section, the results of the two-group analysis between
performance-improving firms and performance-declining firms highlights a significant
between-group difference in CEO performance-based remuneration in each country,
suggests that improvement in performance is likely to be a condition for a higher proportion
of performance-based payment. However, the degree of improvement in performance does
not appear to be a determinant for the proportion of performance pay. Rather, there is
support for the argument that when a firm uses performance-based payment to reward
management for higher performance, the firm's decision is largely based on sales revenue
Table 7
Two-stage least squares analysis of CEO performance-based remuneration within-country performanceimproving companies.
Intercept
Predicted value of change in past year ROE (20022003)
Independent directors on company board
Independent directors for growth firms
CEO duality
Ln total revenue
CEO change
F-statistic
R-square
Adj. R-square
Sig.
Australia performanceimproving companies
Singapore
performanceimproving companies
Coefficient
p-value
Coefficient
p-value
0.111
0.201
0.052
0.196
0.622
0.151
0.057
0.773
0.441
0.792
0.270
0.000
0.292
0.086
0.095
0.245
0.137
0.426
0.383
0.024
0.670
0.446
0.118
0.248
0.001
0.006
3.360
0.341
0.239
0.009
5.954
0.443
0.368
0.000
158
and that larger firms are likely to pay a higher proportion for the performance component
(Anderson & Bizjak, 2003; Coulton & Taylor, 2002; Thompson, 2005).
7.4. Additional tests
Additional between-country and within-country regression tests are conducted to
provide further evidence to verify the above results (additional test results are not reported
in the tables). The country effect on CEO performance-based payment is further tested by
replacing the 5% shareholding measure with the other two ownership-concentration
measures, percentage of shares held by the top 20 shareholders and percentage of shares
held by the largest shareholder. No significant result is found, supporting the original
finding that ownership concentration is not a major factor for CEO remuneration design in
Australia and Singapore. Next, the two-stage least square for each country is re-estimated
by controlling for industry variables. No significant result is found in either country,
suggesting that the proportion of performance pay for performance-improving firms is
unlikely to be affected by the industry effect. Further, previous year's change in financial
performance (20022003) is first replaced by change in ROE from 2001 to 2002 and then
by change in ROE from 2001 to 2003 in order to capture the change in the past two years.
The results are insignificant for each country.
8. Conclusion
This study compares the proportion of performance-based remuneration paid to CEOs
by Australian and Singaporean companies experiencing improvement in financial
performance and the extent to which such pay is determined by change in performance
and board structure. The different owner-management relationships and board-governance
systems found in Australian and Singaporean companies lend themselves to analysis of the
role of an independent board in designing executive remuneration. The comparison
between Australia and Singapore also provides greater insight into how change in
performance might affect the proportion of CEO performance-based remuneration under
different board-monitoring systems in different countries.
The study finds that performance-improving companies in both countries exhibit a
higher rate of CEO performance-based payment than performance-declining companies,
suggesting that performance pay is not only related to the level of performance, as found in
prior research, but also tends to link to change in performance. Companies which
experience improvement in financial performance are likely to reward their CEOs with
greater performance pay. However, companies also seem to be cautious when determining
the proportion of performance pay, given the fact that the performance-based component
constitutes only about 30% of total remuneration. Fixed salary still forms a major part of the
CEO's remuneration. In addition, the results provide evidence that, in both countries, the
proportion of performance pay is likely to be associated with larger firms and sales revenue
is a likely indicator for CEO performance pay as suggested by prior research. While reasons
for a higher proportion of performance-based payment by larger firms could be speculative,
arguments in prior research, that it takes more effort to manage more complex organization
may be supported. Assuming a negative relationship between the availability of quality
159
management-performance information and firm size, and that managers are risk-averse
(Bushman & Smith, 2001; Dalton et al., 1998; Holmstrom, 1979), a higher proportion of
performance-based payment is likely to be used by larger firms when there is a greater risk
and uncertainty. However, it is unclear to what extent this reasoning applies to the
Singaporean situation, where higher ownership concentration exists. Perhaps this reasoning
can be better justified where larger firms are less likely to be associated with CEO duality.14
The similar proportion of CEO performance-based remuneration found in Australian
and Singaporean improving companies casts doubt on the expectation that executives in
more widely held firms, where there is a higher level of ownermanagement conflicts, are
more likely to receive more performance-based remuneration. Given that no significant
association between board structure and performance pay is found, there is little evidence to
support the applicability of the principalagent model and optimal compensation
contracting to explain the CEO performance pay in Australia. As for the Singaporean
case, there is some evidence of the stewardship-role proposition. However, the possibility
of management self-dealing may also be suspected. Previous studies (e.g. Bebchuk et al.,
2002; Shleifer & Vishny, 1997) argue that management self-dealing behavior might exist
where managers are able to negotiate compensation in their interests, often in a non-arm's
length approach, and when corporate governance control is weak. The comparatively less
independent board and remuneration committee in Singapore, the higher degree of
performance improvement, and a wider gap in CEO performance pay between improving
and declining companies, as compared to the Australian case, indicates the possibility of
such behavior. Although self-dealing behavior could also exist in Australia, such problems
may be more serious in Singapore. The possibility of this contention is a subject for further
investigation.
The findings of this study support the regulators' recommendation that good governance
practice involves linking executive remuneration to performance. However, the role of
independent directors in governing executive performance-based payment appears to be
less important than expected in practice. There are two possible explanations. From the
regulatory perspective, the appointment of independent directors on the board could be a
reflection of compliance. The level of independent directors, about 60% in Australia and
40% in Singapore, resembles the regulatory requirement of a majority in Australia and
one-third in Singapore. From a theoretical perspective, Kren and Kerr (1997, p.308)
suggest that the benefit of outside directors' objectivity could be at the cost of an
information deficit regarding the CEO's true capability, effort and responsibility for
performance outcomes. The board and remuneration committee would have to rely on
other sources of information, such as compensation consultants or advisors, in setting
performance-based payment. The independent board's role in monitoring executive pay
could thus be weakened.
The analysis in this study focuses on board structure rather than board process, which
arguably has an influence on the effective functioning of the board (Wan & Ong, 2005). The
different classification and disclosure in the two countries also limit the ability of this study
14
Further analysis reveals a weak, negative correlation between total revenue and CEO duality for the
Singaporean performance-improving sample, suggesting a possible explanation for larger Singaporean firms
using a higher proportion of performance pay to compensate a CEO for a greater level of risk.
160
to test the individual components of CEO performance-based payment. The disclosure of

executive-performance pay by Singaporean companies is only in percentage term, which
restricts the analysis to the percentage level rather than the dollar magnitude of the
performance pay. Future research, using an alternative approach that examines a crosssection of all firms with appropriate controls on performance change, may be worthwhile.
Further analysis comparing different structures of performance-based remuneration paid to
executive over time would also yield greater insight into the design of executiveperformance pay in the global environment.
Acknowledgements
The author gratefully acknowledges the financial support from the ANU College of
Business and Economics, the Australian National University, and the helpful comments by
the Editor, two anonymous reviewers, Greg Shailer, Jacqueline Birt and seminar
participants of the Accounting and Finance Association of Australia and New Zealand
Conference 2006.
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The International Journal of Accounting 44 (2009) 138 162

Executive performance-based remuneration,

J. Lee / The International Journal of Accounting 44 (2009) 138162

Australian and Singaporean performance-improving companies, where the levels of

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

board can be seen as a substitute governance mechanism for management-incentive

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

Percentage change in ROE from 2001 to 2003

Percentage of shares held by shareholders with 5% or more shareholdings

Number of independent directors as a percentage of total board

Other board and firm attributes

Total operating revenue

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

Initial sample satisfying performance criteria

J. Lee / The International Journal of Accounting 44 (2009) 138162

Au-I Australian performance-improving companies.

Osirus is a database containing company data in different countries.

J. Lee / The International Journal of Accounting 44 (2009) 138162

Other board and firm attributes

Au-I Australian performance-improving companies.

within each sector. In both countries, performance-improving firms appear to be

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

Panel A: Financial performance

Au-I Australian performance-improving companies.

and 7% in Singapore). Companies with declining financial performance, however,

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

Significance at 0.1 level.

J. Lee / The International Journal of Accounting 44 (2009) 138162

Australia performanceimproving companies

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

to test the individual components of CEO performance-based payment. The disclosure of

J. Lee / The International Journal of Accounting 44 (2009) 138162

J. Lee / The International Journal of Accounting 44 (2009) 138162

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