BUALNEWS.COM — The distinction of interest between ownership and control in the management company may create a conflict of agency. Agency theory explains that one of the agency conflict is associated with information asymmetry. Management of the company is a party whichis authorized bythe owner to manage the company with the hope will provide a high return on investment owners as capital providers. However, management tends to actopportunistically therebyreducing the company’s performance and impact on decreasing the welfare of the owners of the company. Therefore,we need a goodcorporate governance mechanisms to mitigate the conflict between agents and principals.
The issue of compensationfor the CEO began hotly discussed and a matter of debate in developed countries like America and the UK since the 1990s. Until now, the issue ofcompensation for the CEO is still warm enough to be discussed. The main reason is sometimes higher compensation to executives does not match the performance of a givencompany asto give rise to public anger, especially to the parties concerned. The same thing also expressed that the compensation given to executives is often disproportionate to the contributions made by the executive and the results obtained so thatthe company needed a re-evaluation of action in this regard.
In contrast to developed countries such as America and Britain, in developing countries such as Indonesia, the issue ofCEO compensationis not so popular to be discussed. The issue ofCEO compensationonce a warm conversation around the end of 2005. At that time, theGovernor of Bank Indonesia (BI) Governor’s proposed salary and benefits of BI for 2006 which reached Rp 2.6 billion a year, or Rp 223.7 million per month, as well asBI Senior Deputy Governor salary of Rp 2.2 billion a year, or Rp 169.8 million per month. The proposal has become a problem considering the salary of the President that only one fifth of the proposed salary scale BI(Liputan6, 2005). In addition, the National Savings Bank management share-based remunerationnet income in 2012 to 10 directors amounted to Rp 67.6 billion and Rp 17 commissioners 6, 5 billion, of which the portionof the bonus is less than 1 percent of the profits of 2012.
Furthermore, basedon earnings in the same year, PT Bank Oversea-Chinese Banking Corporation Value Essence Storage (OCBC NISP) Tbk. provide compensation to the five commissioners of Rp 13.86 billion and 10 directors earn Rp 56 billion, which is based on the results of the General Meeting of Shareholders (AGM) PT Bank Himpunan Saudara 1906 Tbk. set board in place bonus of 3 percent of total net income in 2012 is valued at USD 3.56 billion (Kompas.com, 2013).Then the level of the highest compensation in 2012 was awarded by PT Astra International Tbk. the directors and commissioners of companies with total compensation of Rp 994 billion.
In addition to relating to the company’s performance, CEO compensation would not be separated from how good corporate governance mechanisms applied in the company. This study will discuss the mechanisms of good corporate governance such as board independence and gender diversity on CEO compensation.
According to the agency theory, the board of directors is an important governance mechanism that represents the interests of the owner (Fama, 1980)and act to control opportunistic behavior management. The board of directors has the authority toemploy, dismiss, supervise and provide compensationto top-level decision managers or top managers. Whilemanagement is the executive who carries out all activitiescompany operations (manager). This internal control mechanismdone by making a set of rules that govern aboutprofit sharing mechanism, whether in the form ofprofit, return or riskapproved by the principal and agent. In relation tocompensation for the CEO, the role of an effective monitoringof the board is one of the things that influence. Some opinions state that the board of directors non-executive needed to control and supervise the conduct of management that acts to benefit himself so that when the proportion of executive directors is higher than non-executives, the remunerationwill be given will be higher as well as the lack of control of the board of directors non-executive.
Currently, thepresence of women in top management positions and the board of the company has become an issue that is the focus of attention. The number of women in positions of corporate board is still verylittle, although some literature recommend a woman who wasappointed in the position of the board and top management of the company due to the presence ofwomen on the board will increase the effectiveness and tracking function of the board to oversee the actions of the management company that would affect the decision making of the most important companies, one of which related to determining compensation for the CEO.
Research on the board and CEO compensation have been did in the States. This research tries to develop a past study on the influenceboard onCEO compensation board where in developing countries such as Indonesia, which still has a weak system of corporate governance.This empirically test board independence and gender diversity includewoman on board and independent woman board to CEO compensation. Past research has generally examined the impact of gender diversity that proxy withwoman on board on the performance of company. In this study, researchers developed variable of gender diversity by looking at how the impact ofwoman on board and their status as an independent woman board to CEO compensation. These results indicate that the board independence womanindependent woman on the board and the board did not affect CEO compensation.
This study has several limitations: (1) this study took a sample of companies in JII Stock Exchange Indonesiain the year 2012-2016, so that research results cannot give provide the power of generalization broader industrial sector more, (2) All data obtained from the company’s annual report, so thatcompanies that do not present the full data were excluded from the sample. (3) The variable in this study only uses several variables related to CEO compensation, so thatthe research results is inaccurate because there are several other variables related to CEO compensation. (4) Board in this study focused on the commissionersand directors board and gender diversity, should adding characteristicsof gender diversity such as ethnicity, age, background, and the term of office of the members of the board.Based on limitation of research above, here are some recommended improvements for future researchers. (1) for further research expected to increase the sample area of research that give results stronger and better generalization (2) The researchersexpected to test Additionalvariables that arerelevant to CEO compensation. (3) The researchers expected to develop a variable board that test by adding the board is considered more relevant as audit committee and nomination and remuneration committees andadding a proxy for gender diversity such as ethnicity, age, background, and the term of office of the members of the board.
Penulis: Khodijah Ishak, Dosen Manajemen Keuangan Syariah (MKS) Institut Syariah Negeri Junjungan Bengkalis.
