Political Connection and Compensation: The Moderating Role of Corporate Governance and Ownership Type
DOI:
https://doi.org/10.12928/jreksa.v13i1.14985Keywords:
Political connection, executive compensation, corporate governance, ownership type, SOEs and non-SOEsAbstract
This study examines the effect of political connections on executive compensation, with corporate governance and ownership type as moderating variables. Drawing on agency and political economic theories, political connections may distort compensation-setting processes by increasing executives’ bargaining power and reducing alignment with shareholder interests. Using a quantitative approach, this research analyzed 2,977 firm-year observations from state-owned and non-state-owned enterprises listed on the Indonesian Stock Exchange between 2018 and 2023. A random-effects panel-data regression model was employed. The results revealed that political connections increased executive compensation, as hypothesized. The effect was more pronounced in organizations exhibiting superior corporate governance, as indicated by the independence of the Board of Commissioners (BoC). Meanwhile, the independence of BoC might not adequately reflect substantive independence in politically embedded corporate contexts. Theoretically, this study enriches the literature on emerging markets by highlighting how corporate governance legitimizes the utilization of political connections within a fragile institutional context. As the findings indicate that political connections can elevate executive compensation even under ostensibly strong governance structures, this study provides practical implications of strengthening substantive board independence and enhancing transparency in compensation-setting.
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