Indonesia is currently in the process of mandating the establishment of Remuneration Committees (RCs) for all listed companies. However, little is known about the effectiveness of RCs in Indonesia. This study sheds light on this issue, by examining the relationships between RCs, executive and board of director remuneration, and firm performance in Indonesia. This study uses 847 observations of firms listed on the Indonesian Stock Exchange (IDX) during 2014–۲۰۱۷٫ Our results indicate that RCs are positively related to executives remuneration and firm performance. In particular, higher remuneration is only linked to higher performance in firms that have established a remuneration committee. This study documents the interactions between RCs, remuneration levels of senior company officers and firm performance in an emerging market setting with voluntary formation of RCs. This study has implications for regulators and company management in Indonesia (and other emerging markets), as the existence of remuneration committees is found to be associated with more effective remuneration packages and higher firm performance.

Introduction

The existence of various cases of major corporate failures, such as WorldCom, Enron, and Satyam (often called “Enron India”), has caused considerable concern among investors and regulators. To alleviate these concerns and provide investors with increased confidence in financial investments, authorities have introduced initiatives to improve internal control structures of corporations. In Indonesia, this process started in 2000, with the introduction of the Code for Good Corporate Governance issued by the National Committee on Corporate Governance. A subsequent version was issued in 2006 promoting the voluntary establishment of certain board committees, such as audit, nomination and remuneration, risk policy and corporate governance committees. The most recent edition of the Indonesian Corporate Governance Manual, issued in June 2018, states that listed companies “must have” audit, nomination and remuneration committees. This shift in focus from voluntary formation of board committees to mandatory formation is interesting, as little to no research has been conducted in Indonesia about the effectiveness of such committees. This study helps to address this issue by examining the role of the remuneration committee on the remuneration practices of senior company officers and its associated effect on firm performance.