The Relationship Between Executive Compensation and Financial Performance of Companies Listed in Nairobi Securities Exchange in Kenya

Abstract

Compensation schemes are instrumental in motivating the top management executives in making the right investment choices which contribute towards creation of the shareholders‘ wealth. This research study was set out to establish how executive fees contribute towards improving financial performance of listed firms. A descriptive research design was applied to establish the link between executive compensation and financial performance of listed firms. The research study population involved 66 listed firms. Documents sources of data were obtained from capital markets authority covering a period of 5 years from 2010 to 2014. Data was analysed with the help of inferential and descriptive statistics. The research found non-significant nexus between directors‘ compensation and financial performance of listed firms. Executive fees had a positive link to financial performance; capitalization of the market was insignificantly but negatively link to performance. Listed firms should attach their reward schemes to performance to motivate the management team to work harder in the realization of their set targets. Top management should be exposed to a rigorous training and development programmes to polish up their knowledge and skills in implementing their investment decisions to boost profitability. A key limitation for this study is that document sources are historic in nature and might not be accurate; this might impact negatively on the results. The study was limited to 4 study variables; it is worth to note that there are factors that affect performance of firms such as efficiency and competence by the top management. Future researchers might want to find out the linkage between executive fees and other economic factors such as earnings and dividend per share. This might offer more insights to the investors and stakeholders when making investment decisions. Researchers should reinvestigate this study using an exploratory research design that takes a longtime duration; this will allow the researchers to discover the ‗cause and effect relation that might be present between variables.