Compensation Committee Diversity and Board Compensation: The Case of an Emerging Economy

This study examines the relationship between the diversity of the compensation committee and executive compensation in Malaysia from 2016 to 2018. We utilized agency theory to derive our hypotheses. Independent variables include compensation committee diversity and independent directors, while control variables cover board characteristics and firm-specific factors such as size, leverage, profitability, industry, and year effects in all models. The findings demonstrated that all the diversity components of the compensation committee tested are insignificant in influencing the extent of board compensation. Control variables such as board size, firm size, and profitability were found to be positively related to board compensation. The findings will be useful for policymakers in setting guidelines for diversity in the compensation committee or the board in general. The Malaysian Code on Corporate Governance (MCCG 2021) promotes diversity on the board as one of the mechanisms that can improve a firm’s governance structure. While diversity is prevalent in Western markets, this study believes that the same policy might be less effective in Asian countries such as Malaysia, where Eastern values and culture are very different compared to their Western counterparts. Policymakers need to revisit whether diversity is necessary in the context of Malaysia. To the best of our knowledge, based on the observation of the literature in this area, this is the first study that examines the effect of a wide-ranging diversity perspective of the compensation committee on executive compensation in the context of an emerging economy such as Malaysia.