This paper examines role of remuneration committee in the pay-setting process under different ownership structures. The survey results show that the members of the remuneration committee see a positive role in the pay-setting process, and thereby, improve corporate governance. The empirical analysis highlights the role of remuneration committee in the pay-setting process in firms, where family members do not hold the top management position and have a positive impact on the performance. In family-owned and controlled firms, the remuneration committee has a limited role to play on both, pay-setting process and impacting performance through top management pay. Remuneration committee, thus, plays an important role in mitigating agency problem, which is expected to be high when family ownership is low or non-family members hold key positions.

Modern corporate form of organizations inherited the problems associated with separation of ownership and control. Corporate governance assumes importance in this context as a direct and an effective way of solving the problems associated with separation of ownership and control. Corporate governance consists of a set of institutional and market mechanisms aimed at aligning the interests of managers with the shareholders or owners. Among several options available in aligning the interests of managers with shareholders, incentive system plays an important role. In this context, managerial remuneration, in general, and performance-based managerial remuneration, in particular, assume significance and play an important role in solving agency problem and as a consequence, improve corporate governance. However, with management having a role to play in determining its own pay, it tantamounts to management writing its own remuneration contract and in the process failing to improve corporate governance.

Hence, many committees on corporate governance recommended the need for a separate subcommittee of the Board called Remuneration Committee (RC) to fix top management pay. Committee members are expected to be independent members of the Board. They are expected to fix remuneration in such a manner that it provides an incentive system to align the interests of management with that of the shareholders or stakeholders, wherever applicable. This paper examines the role and functioning of RC, which many Indian companies have constituted as a part of compliance with corporate governance norms, in setting managerial remuneration.

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