From the 1980s there is a huge literature on the compensation of the managers. It is an incentive mechanism which is offered by the shareholders to the managers to motivate them towards the performance of the organization (Jensen & Meckling, 1976; Jensen & Murphy, 1990). There are also literatures to find out the relationship between managerial incentives and ownership structure. Organizations having more presence of outside shareholders in the ownership structure are intended to use less equity-based compensations (Mehran, 1995).
Murphy has given a theory called agency theory and according to him interests of the managers in an organization can be aligned with the interests of the stakeholders only by relating the incentives of the managers with the performance of the company (Murphy, 1999). However the proofs in the already studied literatures are not the same. In developed countries most of the studies show that there is very strong and positive relationship between the firm performance and managerial incentives. Compensation of the board of directors is related to the ownership structure. Mehran did a study on 153 random organizations between 1979 and 1980 and found that the firm’s performance is very much dependent on the incentives given to the managers (Mehran, 1998). Berger did a study on 452 U.S. companies and found out that cash salary and bonus payments were used instead of fixed salaries. It shows that the changes in the value of firm do not affect the CEO’s salary and bonus compensation.