Excess Compensation: Agency Cost or Performance Motivator? Perspectives from Governance Structures in Korea

In this study, we investigate whether govemance structures are associated with excess cash compensation, which is defined as observed cash compensation determinants. Six measures of governance structures are examined in this study: (1) the owner-managers; (2) block-holders; (3) foreign shareholders; (4) institutional investors; (5) financial institutions; and (6) chaebols. Based on 6,823 observations in Korea from 2000 to 2009, the results indicate that governance structures are significantly related to excess cash compensation. Specifically, ownership by block-holders and the magnitude of debts from financial institutions are negatively related to excess cash compensation, whereas ownership by owner-managers and foreign shareholders, and chaebols are positively related to excess cash compensation. An additional test suggests that excess cash compensation is positively associated with current accounting performance of firms. The findings of this study imply that excess cash compensation can be used as a motivator for directors to improve financial performance of firms consistent with Fama (1980), while it can also represent an agency cost consistent with Core et al. (1999) under certain circumstances.