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Director compensation in emerging markets is an important issue because of the endemic information asymmetry and weak corporate governance. Using a unique sample of Thai corporations between 2002 and 2008, I find that director compensation is greater in family firms and that executive pay is primarily driven by corporate performance. However, this positive performance-pay relation is attenuated when directors own large shareholdings in their corporation. Finally, standard governance structures such as non-executive directors and splitting the CEO/chairman role are found to have little impact on Thai executive pay.

Agency theory has attracted the interest of academics, investors and market regulators since Jensen and Meckling (1976), who argued that there are natural conflicts of interest between managers and shareholders. These conflicts of interest can, nevertheless, be mitigated through appropriate incentive mechanisms. Previous research in this area has primarily focused on the effect of CEO compensation on firm performance (Boyd, 1994 and Jensen and Murphy, 1990). The board of directors is a corporate structure that, in theory, helps to solve the agency problems inherent in managing an organization. As a primary internal control mechanism, the board plays a significant role in safeguarding shareholder interests by designing appropriate executive compensation contracts and monitoring CEO behavior (Conyon and Peck, 1998 and Hermalin and Weisbach, 2003). Typically, shareholders do not escape agency problems by delegating solutions to the board since directors are themselves agents whose interests are not necessarily aligned with those of shareholders (Hermalin & Weisbach, 1991). This problem can commonly be found in developed countries, where many firms are widely held. La Porta, Lopez-de-Silanes, and Shleifer (1999) indicate that a large proportion of public and private firms around the world are family-controlled. This can produce an intense concentration of management and firm benefits by unifying the board of directors and management team. However, in family firms, there is a danger that controlling shareholders can expropriate wealth from minority investors because of the close links between management and the controlling owner (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2002). This type of relationship in family firms is different from that where ownership and control is separated – typically in Anglo-American economies (Dogan & Smyth, 2002). However, the variations in ownership structure can lead to differences in executive compensation. In widely held firms, directors may exploit the weakness of individual investors and control their own compensation structure. However, the problem may also be prevalent in closely held firms, where executives can be compensated for pursuing policies that are beneficial only to the largest shareholders. Existing empirical evidence of the relationship between director compensation and firm performance is varied. For example, Gregg, Machin, and Szymanski (1993), Conyon (1995) and Doucouliagos, Haman, and Askary (2007) find no relationship between director compensation and firm performance, whereas Conyon and Leech (1994) and Barontini and Bozzi (2011) report a positive pay-performance relationship. Further, Dogan and Smyth (2002) show that the relationship between director compensation and firm performance is ambiguous. More recent studies attempt to investigate the influence of family control on the relationship between director compensation and firm performance as a result of the uniqueness of agency costs in family firms. The cases in question are Barontini and Bozzi (2011) and Connelly, Limpaphayom, and Sullivan (2012). Barontini and Bozzi (2011) report sub-optimal compensation practices as a result of the inverse relationship between board compensation and subsequent firm performance in founder-family firms in Italy. Also, high ownership concentration is associated with lower board pay. Connelly et al. (2012a) analyze the influence of family ownership on board compensation in two sub-samples of low and high family ownership Thai listed firms. Thai firms with high levels of family ownership exhibit a strong positive link between director compensation and performance. Likewise, Cheung, Stouraitis, and Wong (2005) confirm family control to be associated with low executive compensation when the chairman holds a small percentage of the firm's shares, and with high executive compensation when the chairman owns significant shareholdings. However, as far as can be ascertained, no scientific literature investigates the relationship between director compensation and firm performance by analyzing family and non-family firms separately and with time-series analysis. The main goal in this paper is to ascertain whether the relationship between director compensation and firm performance depends on the dominance of family ownership within an emerging market, Thailand. Claessens, Djankov, and Lang (2000) report that family dominated firms are widespread in emerging Asian countries. Thai-listed firms have the highest ownership concentration of the nine East Asian corporations. Further, Laoniramai (2012) documents that Thai listed firms have particular characteristics and ownership structures which are typically strong family-controlled structures. An analysis of Thai listed firms reveals an environment characterized by high family ownership, which is common in other emerging markets, but which adopts foreign corporate governance principles, i.e. the principles of corporate governance of the OECD and an Anglo-Saxon legal approach. Although adopting the U.S. Sarbanes-Oxley Act in 2002, the Stock Exchange of Thailand (SET) and the Thai Securities and Exchange Commission (SEC) emphasize the board of directors’ role, rather than top executives’ direct responsibilities for certification of financial statement as well as the effectiveness of internal control (Budsaratragoon, Hillier, & Lhaopadchan, 2012). Thai family firms are defined by the Stock Exchange of Thailand as those in which family members (including anyone who has a blood relationship or in-law relationship) hold a minimum of 25% of total stock equity. According to the Public Limited Companies Act, at this level of shareholdings, an investor has sufficient voting power to significantly influence firm strategy (Wiwattanakantang, 2001b). The scope of analysis also looks at the evolution of director compensation and board characteristics since the principles of corporate governance were initially implemented for listed firms in 2002. The period spans 2002 to 2008, so covering the first implementation of principles of corporate governance in 2002 and the change of the principles in 2006. This study contributes to the literature in several ways. First, through the analysis of Thai listed firms, empirical evidence is provided on compensation practices in emerging markets. Second, I consider the sensitivity of executive pay to corporate performance in an emerging market context. Third, I investigate the prevalence of other compensation forms in emerging market director compensation. Finally, I highlight whether corporate governance structures that are common in developed countries are effective in an emerging market setting. Four main sets of findings emerge. First, the identity of the firm – family or non-family – is significantly related to board compensation. One interpretation that emerges from the analysis is that in the presence of information asymmetry between entrenched executives and outside investors, family firm directors may use their ownership rights to extract higher director compensation for themselves. This finding follows the notion that the primary agency conflict in family firms is between the controlling family and minority shareholders. Moreover, family control may harm minority shareholders due to the risk of expropriation when transparency is low. Second, the positive relationship between pay and performance is found only in family firms. Family firms tend to align the interest between owners and executives. This may imply that the board of directors plays a key role in both monitoring and decision-making in family firms. By contrast, the monitoring role is held by a board of directors, but the decision-making role is in the hands of a CEO in non-family firms. This is consistent with the argument that family control can reduce the agency problem between pay and performance (Fama & Jensen, 1983). Third, higher director ownership is associated with lower executive pay in both family and non-family firms. Director shareholders may maintain low levels of compensation in order to send a positive signal to investors, resulting in a positive effect on the value of their firm's shares. In other words, when director ownership is high, directors’ interests are more closely aligned to other investors’ interests and, are less inclined to divert resources away from maximizing firm value. This is consistent with the notion that conflicts of interest between majority and minority shareholders are more easily resolved at the board level. Finally, independent directors appear to play no role in the level of director compensation in any type of firm (i.e. family and non-family firms). In Thailand, independent directors are nominated by large shareholders and their business networks. Thus, it appears that independent directors’ have little power or incentive to monitor corporate activities and, in a sense, are not fully independent. The split of chairman and CEO positions has a positive impact only in non-family firms. The board of directors in non-family firms, especially in the case of CEO split firms, need stronger monitoring than in family firms. The rest of the paper is structured as follows. Section 2 presents the Thai institutional environment. In Section 3, the theoretical literature and hypotheses are briefly discussed. Section 4 presents the research methodology and this is followed by the results and discussion in Section 5. Additionally, concluding remarks are provided in the final section.

This paper highlights the effect of family ownership on the relationship between director compensation and firm performance by using Thai listed firms in two sub-samples of family and non-family firms. Moreover, this paper examines the effect of director ownership and board characteristics on director compensation. The sample covers panel data on non-financial firms during the period 2002–2008. The paper documents a number of salient findings. The “identity” of a firm – whether the firm is a family or non-family controlled – is significantly related to board compensation, suggesting the different determinants of board compensation in family and non-family firms. Family firms have a significantly positive association with director compensation. The level of director compensation is influenced by the nature of the ownership. One interpretation that emerges from this analysis is that in the presence of information asymmetry between entrenched executives and outside investors, family firms may use their ownership rights to extract higher director compensation for themselves. This finding reflects the notion that the primary agency conflict in family firms is between the controlling family and minority shareholders. With respect to family firms, this result supports the hypothesis of rent extraction through the payment of excess compensation to the board. The reports find that performance is a driver of director compensation in family firms only. This finding attests that the interests of shareholders and director compensation are apparently linked in family firms and consistent with agency theory as found in US and UK markets, but there is no relationship in non-family firms. Moreover, director compensation depends on the firm's future prospects (Tobin's Q) rather than present prospects (ROA). The paper shows that at the high level of director ownership, the interests of shareholders and directors on the board can be better aligned in any type of firm, i.e. family and non-family firms. This alignment tends to reduce director compensation level. This is consistent with the notion that conflicts between majority and minority shareholders are more easily resolved at the board level. This study finds no link between director compensation and the presence of independent directors on the board. This can be supported by Connelly et al. (2012a) who state that, in particular, conventional measures of corporate governance quality such as board independence are not particularly effective. Though, on the surface, good governance practices appear to be in place, the effectiveness of these practices can be blunted. Finally, This paper shows that CEO split from chairman has no impact on director compensation in family firms but this is not so in non-family firms. The reason is probably that an extra incentive is required when the management and supervisory responsibilities are held by different persons to promote the alignment of executives’ and shareholders’ interests in non-family firms. Future extensions of this research might study other determinants of director compensation such as dual share classes with differential voting rights, pyramids, cross-holdings, voting agreements, independent director selection criteria and attributes, as well as firm age. As Bender (2003) suggests executive compensation reflects aspects of both economic and social-psychological theories, qualitative research should be conducted in order to explain the results of the statistical model analysis.