Advances in Economics, Business and Management Research, volume 132

6th Annual International Conference on Management Research (AICMaR 2019)

Cash Compensation, Corporate Governance,

Ownership, and Dividend Policy on Banking
Performance

Tafdil Husni*, Rida Rahim, Riyadi Aprayuda

Department of Management, Faculty of Economics
Andalas University
Padang, West Sumatra-Indonesia
*tafdilhusni@eb.unand.ac.id, ridarahim@eb.unand.ac.id, riyadiaprayuda@gmail.com

Abstract—This study analyzes the behavior of cash To maintain financial stability requires the establishment of
compensation, corporate governance, dividend policy and the effective control mechanisms at banks, namely banking
performance of the Banking Industry in Indonesia. This study governance is one mechanism that maintains banking
uses 33 go-public banks that are listed on the Indonesia Stock performance and is responsible for the difficulties facing the
Exchange with 165 observations in 2014-2018. The analytical global economy [6]. Several studies, such as Shleifer and
method uses Panel data regression with the Random Effect Vishny [7]; Baker and Gompers [8], found that governance
Model (REM). The results of the regression data obtained by the mechanisms are expensive to implement. Jensen and Meckling
executive compensation had a significant positive effect on [9] states that monitoring can reduce agency problems when
company performance, the proportion of compensation received
insider ownership is low. Companies adopt governance
by executives tended to have a direct impact on firm value. The
results also showed that dividend policy had a significant positive
mechanisms to align the interests of directors with shareholders
effect on firm value, the greater the number of dividends [7]. The Basel Committee on Banking Supervision 2006
distributed gave a positive signal to the market. increases the need for banks to strengthen their governance
practices.
Keywords: corporate governance, dividends, the performance of Problems that arise in agency relationships are due to
the Banking Industry human nature (self-interest, bounded rationality, risk aversion)
so that the agency theory is the organizational pressure
I. INTRODUCTION (conflicting goals between members) and information (as a
Banking performance is a major problem for policy makers commodity that can be purchased) [10]. Efforts to minimize or
and decision-makers mainly because it is the foundation for the control conflicts between agents and principals one of which is
stability and smooth functioning of the financial and banking the structure of compensation and ownership of shares 41, and
system [1]. Bank's core competencies are not only inherent in consider CEO incentives or equity-based payments (stock
the exchange of funds but also in their ability to manage credit options), salaries, bonuses and benefits as compensation that
risk. Interest income, which is considered as the main source of can improve performance [11], and can effectively minimize
banking income, is generated to compensate for the operating conflicts of interest [12]. Providing high compensation to
costs of lending [2]. Poor bank performance is directly related executives / CEOs in the banking sector is expected to create
to a weak economic-financial system. Bank performance is productivity, profit, growth and minimize risk and improve
influenced by their operating models, governance, policies and banking performance. Principals can limit the divergence of
ownership structure [3,4]. In Indonesia, credit risk, weak their interests by providing an appropriate level of incentive to
demand, and margin requirements are still the biggest risk the agent and are willing to pay a monitoring fee to prevent the
challenges that must be faced in banking performance such as hazard from the agent. With the right compensation system for
Wake [5] in a survey of banking directors shown in Figure 1. executives, it is expected that executives will not try to
maximize their personal profits and remain focused on the
company's main objectives. In fact the current conditions of
high executive compensation can encourage executives to take
too much risk (risk taking) that could endanger the stability of
their company. The causes of the 2007-2008 global financial
crisis, including high compensation. This shows that there is a
moral hazard problem in executive / CEO behavior, which is a
conflict of interest between owners and agents.

Fig. 1. Indonesia banking risk challenges (price waterhouse coopers Seen from the perspective of banking performance and risk,
Indonesia 2018). banking directors in Indonesia are classified as risk-converters

Copyright © 2020 The Authors. Published by Atlantis Press SARL.

This is an open access article distributed under the CC BY-NC 4.0 license -http://creativecommons.org/licenses/by-nc/4.0/. 212
 Advances in Economics, Business and Management Research, volume 132

because they are very careful in providing credit and face the negative impact on performance. Companies with high
company's operational risk [13]. Because compensation concentrated ownership are more vulnerable to financial
payments based on cash incentives are considered less risky difficulties and crises.
because they refer to performance results and are not based on
market values such as equity compensation. According to the Thillainathan [32] attributed the high concentration of
agency theory, the manager is an agent in the company and the ownership structure of Malaysian banks as one of the main
shareholders are the owners of the company, each individual is factors that caused banks to suffer severe financial difficulties
only motivated by their respective interests for which executive in 1998. With the presence of large shareholders with high
compensation is present. Some arguments state that executive authority to make decisions and control management creates
compensation must be linked to company performance. long-term moral hazard behavior affect bank performance. This
Conversely, some say executive rewards will benefit the is because large shareholders tend to behave independently by
company long-term but will not be seen in current performance making decisions that will maximize their profits even though
[14]. these decisions can increase bank risk and endanger the long-
term performance of the bank and the viability of the bank.
Research Caprio et al. [15] proves compensation provides Different types of shareholders always have priorities (insiders
benefits for reducing bank risk, proxied by NPL (non- and outsiders ownership, different preferences and goals.
performing loans), LDR (loan to deposit ratio), and OR Ongore [33]; Porta et al. [34] find that the type of ownership
(operational risk) which means giving compensation in cash in structure determines company performance. The difference in
the form of salary, bonuses, and benefits are the implications of ownership structure has two consequences. It is clear that,
the results of the performance of the board of directors so as to controlling shareholders have the incentive and power to
reduce risk with NPL and OR proxies and overcome the discipline management and, controlling shareholders can create
problems of moral hazard (agency) in the banking industry. conditions for new problems when their interests are not
Supported by Athar et al. [16] revealed that there is a aligned with the interests of minority shareholders [28].
significant and positive correlation between company
performance and CEO cash compensation (basic salary, Other factors that affect banking performance and risk are
bonuses, benefits and special allowances) in the Pakistani dividend payments [35]. Companies consider dividend
banking industry is highly dependent on the total assets of decisions to be quite important because they determine what
companies that have significant and positive impact. Rajgopal, funds flow to investors and what funds are kept by companies
and Shevlin [17] who found a significant relationship between for investment. Dividend policies can also provide information
compensation in the form of stock options on performance, in to stakeholders about company performance and signal future
line with research by Coles et al. [18] found there is an effect company performance [36-40]. But recently, the results have
of compensation structure on performance. Jensen and Murphy been mixed that dividend changes do not predict future
[19] states that there is a positive relationship between earnings growth in companies [41,42]. On the other hand, large
company performance and executive compensation. Attractive amounts of dividends can cause defaults, and therefore must be
compensation will encourage executives to work to improve avoided by banks paying large amounts of dividends to
company performance and there is a positive relationship shareholders during a crisis [43], on the other hand, banks are
between salary payments and company performance [20-22]. encouraged to increase bankruptcy risk. This type of moral
In contrast, the results of the research by McKnight and hazard behavior can be caused by regulations that isolate bank
Tomkins [23]; Veliyath [24] found compensation payments owners from bankruptcy risk (implied bailout guarantees).
had no effect on performance. Supported by Firth [25], This study aims to broaden the gap filled with previous
research there is no relationship between compensation research, and by looking at the effects of governance, cash
payments and company performance. Balachandran et al. [13] compensation, ownership, on company performance.
found evidence that there was no relationship between CEO Specifically, this study highlights the relationship between
cash compensation and performance among developing company performance and compensation for directors,
country companies. dividends, managerial ownership, ownership institutions,
Ownership is also seen as reducing agency problems independent boards, annual meeting frequency size. The next
section is presented to review the relevant literature and explain
between shareholders and managers resulting from the
separation between ownership and control [26]. In the banking our hypothesis. Acharya et al. [43] presented to illustrate the
case, Ungureanu [27] states that concentrated managerial data and methodology. Finally, Adesina [44] discusses the
ownership increases bank control and monitoring of its research findings and Agbatogun, and Adewumi [38] presents
activities through better information flow. Large shareholders conclusions and implications.
are more effective in exercising their rights, so they have more
control over management. The existence of Big Managerial II. RELATED LITERATURE AND HYPOTHESIS DEVELOPMENT
Ownership is also associated with high bank performance. An agency relationship is a contract between one person or
Morck et al. [28] show that Managerial Ownership by more (principal) and another person (agent) were the principal
corporate block holders is positively related to firm value, and delegates the decision-making authority of the agent to do
Claessens et al [29]; Cole, and Mehran [30] found that there is some work on their behalf [25]. Principals have limitations in
a strong positive relationship between managerial ownership managing the company so they hand over management
and profitability. On the other hand contrary to the findings of responsibilities to the agent. The management which is obliged
Berger et al.[31] managerial ownership was found to have a to manage the company is expected to be able to increase the

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principal's welfare through increasing the company's value. If rights directly and indirectly of 10% or more then it is called a
that can be realized, they will get rewards in the form of large shareholder and vice versa, if the shareholder has control
bonuses and other compensation. rights and cash flow rights of less than 10%, then the bank
classified as widely he ld. The results showed that ownership in
The separation of ownership and control of the company an institution also influences the activities in it. The series of
between the owner (principal) and management (agent) tends activities ultimately has implications for the performance
to cause agency conflict. This arises because agents do not process and decision-making behavior. This also happens in
always act in the interests of the principal alone. Agents have the banking industry, the identity of ownership in the bank will
the authority to manage the company so that they do not rule also determine the risk taking and banking performance
out the possibility that they determine policies that also [47,48].
maximize their well-being. Eisenhardt [10] explains that there
are three assumptions about human nature, namely: Humans Research on ownership of banking performance has been
tend to be more selfish (self-interest), Humans have limited carried out by previous researchers such as Claessens et al.
information, cognitive abilities, and time in decision making [29]; Cole and Mehran [30] found that there is a strong positive
(bounded rationality), and humans tend to avoid risk (risk- relationship between managerial ownership and company
averse). Based on these assumptions, principals and agents as performance. Mangel and Singh [49] also state that a good
humans will naturally act opportunistically in their interests. level of supervision of management within a company is
positively related to the high percentage of institutional
Company value is the investor's perception of the company, ownership. Thus the proportion of institutional ownership acts
which is often associated with stock prices. The value of a as a deterrent to waste by management. Ongore [33] and Porta
company formed through stock market indicators is greatly et al. [34] find that the type of ownership structure determines
influenced by investment opportunities. Investment performance. The second and third hypothesis propose is:
expenditure gives a positive signal to managers about the
company's growth in the future, thus increasing stock prices as  H2: Managerial ownership has a positive effect on
an indicator of company value. High stock prices make the banking performance
value of the company also high [45]. In this study, the authors
chose Tobin's Q because this indicator is accurate to measure  H3: Institutional ownership has a negative effect on
the performance of companies affected by executive banking performance
compensation. Also, the measurement of company Dividend is the distribution of cash or other assets to
performance using Tobin's Q not only provides an overview of shareholders proportionally (based on the number of shares
the fundamental aspects but the extent of assessing the owned) [11]. Dividend policy is a decision to determine how
company from various aspects seen by outsiders including much of the company's profits will be distributed to
investors. Tobin's Q represents several important variables in shareholders and will be retained in the form of retained
measuring performance, including the company's listed assets, earnings to finance investment in the future Dividend policy
adequate market trends, and intangible asset variables. can be used as a means to overcome agency problems between
Providing compensation is also one of how the company corporate management and shareholders According to this
owner deals with agency conflicts that often occur within the assumption, if profits are not distributed to shareholders, there
company due to information asymmetry. Jensen and Murphy is a concern that earnings will be used for personal benefit
[19] states that the provision of compensation packages can be management or for the procurement of unprofitable projects
used to overcome the problem of moral hazard management. that tend to spend company money. Therefore, shareholders
The higher compensation will be given, the company hopes to will prefer dividends rather than retained earnings [50].
minimize risk and management performance will increase. According to Acharya et al. [51], the best solution for banks
Research on executive compensation for performance has that carry out high risk-taking is to hold back their cash flow
been carried out by previous researchers found a significant for the sake of bank capital adequacy because the bank has a
relationship between cash compensation and performance [17- high potential for default. However, Acharya et al. [46] found
22]. The first hypothesis propose is: the fact that banks actually use their cash flow to pay
dividends. This happens because the dividend policy is
 H1: Compensation has a positive effect on banking regulated to maximize shareholder value. Onali [52] also states
performance that in non-financial companies, high risk-taking results in low
dividend distribution (negatively related), but in the banking
Firth et al. [25] explain that ownership structure shows the
industry (public guarantee) there is a possibility that the two
large percentage of share ownership by insider (management)
will be positively related.
and outsider (investors who do not have a direct role in
company management. In addition, ownership structure can act Research on dividend policy on company performance has
as a form of commitment to delegate control to a certain degree been done by previous researchers found that dividend policy
at management [46]. Shareholders with large share ownership can also provide information to stakeholders about company
have voting rights that can control management, whereas if performance and signal future company performance [36-
shareholders own only a small portion of the company's shares, 40,44]. The fourth hypothesis propose is:
it will be difficult for them to control managerial activities,
Caprio et al. [15] classify ownership in the bank becomes two,  H4: Bank dividends have a positive effect on bank
namely if the shareholder has control rights and cash flow performance

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In the Financial Services Authority Regulation No. 33 [53] TABLE I. DESCRIPTIVE STATISTICS
there are rules regarding meetings / meetings that must be
Variable Mean Maximum Minimum
conducted by the board of commissioners and directors.
1.034246
According to the regulation, the board of commissioners is Tobin’Q 1.669502 0.239458
(0.251436)
required to hold regular meetings at least four times a year and
0.3750
directors are required to meet once a month. For this reason, Deviden 1.0000 0.0000
(0.0276)
the number of meetings of the board of commissioners and
10.39672
directors is used for one year or annual meeting frequency. LOG EC 13.33848 7.886457
(1.366123)
Several components in board characteristics, namely board
0.01152 0.76543
size, board meeting, independent board, busyness board, and MO 0.0000
(0.00245)
duality board, produce that board meeting has a positive impact
0.033528
on company performance [54]. The fifth hypothesis propose is: IO 0.720688 0.0384
(0.2283)
 H5: Annual meeting frequency has a positive effect on Ind Board
0.962422 1.609438
0.0000
banking performance (0.348268)
3.560071
LOG AMF 5.455321 1.609438
(0.614707)
III. METHODS
15.3128 17,8545
The unit of analysis of this research is the bank. Population LOG Size 11.2269
(0.4770)
is a public company whose shares are listed on the IDX. The Observation 165
research period is 5 years (2014-2018), involving banks with Table 1 represents the parameter coefficients of the descriptive statistic results, maximum,
165 observations. Specifically, the financial sector in Indonesia minimum, mean, median, and standard deviation.

has determined the grouping of various core capital sizes of

banks that have been set by the regulator, but we do not follow TABLE II. COLLINEARITY TEST
the grouping of banks here only focus on the mechanism of
cash compensation, ownership, dividends, independent boards, EC Dev MO IO
annual meeting frequency and company size. The type of data EC 1 -0.4213 -0.3324 0,1288
used in this study is secondary data, namely the company's Dev -0.4213 1 -0.2390 0.3465
annual report on the Indonesia Stock Exchange -
MO -0.3324 -0.2390 1
0.1643
Analysis of PLS model selection is done by a fixed-effect IO 0,1288 0.3465 -0.1643 1
model (FEM) and then between FEM and REM models can be IB 0.3627 0.6521 -0.3427 0.1654
seen in the results of the Chow and Hausman test. The Chow AMF 0.1887 0,4533 0.4318 0.6543
test results show that Prob = 0.0000 for cross section F, which Siz 0.4386 0.6549 0.2352 0.4321
is less than 0.05, so H0 is rejected. Therefore, it can be
concluded that with a 95% confidence level, the panel model is IB AMF Siz
better than the general effect model. Then the Hausman test 0.3627 0.1887 0.4386
was carried out, yielding a Prob = 0.0306 for a random cross 0.6521 0.4533 0.6549
section, which was smaller than 0.05. The decision is to accept -0.3427 0.4318 0.2352
H0 so that it can be concluded that with a 95% confidence 0.1654 0.6543 0.4321
level, the effect model is still better than the random model. 1 0.4321 0.5324
0.4321 1 0.4326
Tobin’Qit = αoi + β1CompBODit + β2 Dev it + Tabel 2 epresents EC is excecutive compensation, Dev is Deviden policy, MO is Managerial
β3Owmanagit + β4Owninstit + β5IndpBit + β6AMFit (1) ownership, IO is institutional ownership, IB is independent board, AMF is annual meeting and
+β7Sizeit +eit Siz is Size Firm

A. Data Analysis Method Table II explains the correlation matrix. From the
The data used in this research is secondary data. The correlation matrix, it is illustrated that EC (Board of Directors
acquisition method used for secondary data is the compensation), IO (Ownership of Institutional), IndpB
documentation method. Some data obtained from financial (Independent Board), AMT (Annual meeting frequency), SIZ
statements published in the company. The descriptive statistical (company size) are positively correlated with Performance
analysis shown in Table I illustrates company-specific (Tobin'Q), this shows an indication every time there is an
variables, namely Performance (Tobin'Q), EC (Compensation increase in these variables add to the company's performance
of directors), Dev (Dividend), MO (Managerial Ownership), besides Dev (Dividend), MO (Managerial Owners), negatively
IndpB (Independent Board of Ownership of Institutional) IO correlated with Performance (Tobin'Q). This shows the fact
(Independent Board), AMT (Annual meeting frequency), SIZ that every time there is an increase in these variables will
(company size). reduce company performance. Table 2 also explains the results
of the correlation test between the research variables, the
correlation value between the independent variables shows that
there are no symptoms of multicollinearity. This can be seen
from the correlation between independent variables <0.8.

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IV. RESULTS AND DISCUSSION Ongore [33], Porta et al. [34] found that the type of ownership
Table III presents the results of multiple linear regression structure determines company performance.
tests of cash compensation, ownership, dividends, independent Similarly, ownership and independence of the frequency of
boards, annual meeting frequency and company-specific meetings held also does not provide an increase in
factors such as company size. Estimation results and statistical performance. It seems that in Indonesian banking, ownership
models show the significant impact of cash compensation on identity in the bank does not determine risk-taking and banking
company performance. performance and the performance is still influenced by other
TABLE III. REGRESSION RESULTS factors and the independent role of the board has not been able
to show an increase in performance.
Variable Coefficient
C
-0.063143 The results of testing the size control variable on the
(0.0005) performance show the effect. This indicates that the size
0.23208 differences in banks show different performance, the bigger the
EC
(0.0584)***
size, the better the bank's performance and vice versa.
0.003982 *
Dev
(0.05932)
MO
0.056781 V. CONCLUSIONS AND IMPLICATIONS
(0.12768)
0.01638 Based on the results of the study, it can be concluded that
IO compensation increases the value of the company. This means
(0.14387)
IndpB
-0.008403 that the provision of cash compensation in the form of salary,
(0.13436) bonuses, and incentives is considered as an implication given
0.00745 from executive performance. The results of this study indicate
Siz
(0.03126)**
R- squared 0.184634
that the variable executive compensation, dividend, and size
Adjusted R-squared 0.145618 are variables that have a significant positive effect on Tobin's
F-statistic .481146 Q. cash in the form of salaries, bonuses, and incentives is
Prob(F-statistic) 0.001045 considered as the implications given from executive
Table 3 Significant 1%***, 5% ** and 10%* performance so as to improve company performance, with the
motive behavior of bank executives who expect or obtain
Cash compensation test results have a positive Cash higher compensation and continue to want to increase the value
compensation test results have a positive influence on company of the company. Dividend policy can also provide information
performance. These results indicate cash compensation given to stakeholders about the company's performance as well as
to bank executives will have an impact on company signal the company's performance in the future. The greater the
performance [18]. This happens because attractive amount of dividends distributed gives a positive signal to the
compensation will encourage executives to work to improve market.
company performance. This makes Hypothesis 1 accepted in
line with several previous studies compensation provided will These findings are consistent and provide evidence to
give an indication of improved performance [20-22]. The support agency theory, namely that the provision of
higher the cash compensation such as basic salary, bonuses, compensation is also an effective way for company owners to
benefits, and special allowances are given to directors, the deal with agency conflicts that often occur within the company
better the performance of directors and encourage company caused by information asymmetry, the higher the compensation
performance [13]. that will be given, the company hopes can minimize risk and
improve management performance. This research indicates that
Meanwhile, Dividends have a significant positive effect on compensation in Indonesian banking companies is still the
company performance. This result shows because the dividend thing that drives performance, interesting compensation will
policy decision is quite important because it determines what encourage Indonesian banking executives to try to improve
funds flow to investors and what funds are kept by companies company performance so as to increase company value. Giving
for investment. This makes Hypothesis 4 accepted in line with sufficient compensation and dividends can be used as a
some previous studies [35-37,39,40,44]. Dividend policy can strategy to improve the performance of directors in managing
also provide information to stakeholders about company the company.
performance and signal future company performance. The
greater the amount of dividends distributed gives a positive Research suggestions in the future researchers can extend
signal to the market. the observation period so that the research outcome variables
are more accurate, specific on the separation of conventional
The role of managerial, institutional and independent board and Islamic banks which are not considered in this study and
ownership does not affect because companies owned by the look at instruments for improving performance in Islamic
founding family or the board of directors and commissioners banks or comparing them to Indonesian banks as a country
themselves lack incentives to manage income, because they do with Muslims most, it is also hoped that further research will
not have high pressure to meet or beat income expectations separate compensation between directors, commissioners and
[55]. The results of this study produce that the two types of management and can sort compensation in depth.
ownership structure and independent board do not influence
performance, the results of this study are not in line with

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