The Relationship Between Performance and Executive Compensation of Firms Listed on the Nairobi Securities Exchange

Abstract

The relationship between executive remuneration and firm performance has been widely discussed in corporate circles. The agency theory being one of the main drivers of the discussion posits that if company executives who are agents of shareholders are well remunerated, they are expected to make decisions that affect the company positively in terms of results and financial performance. This is done through aligning the interest of the executives with that of the shareholder through systems such as a pay-performance incentive scheme. This in effect also reduces the probability of the executives pursuing selfish goals. There have been mixed results in the findings of this study which has been done in different parts of the world. While some have revealed a positive relationship between executive remuneration and firm performance, others have shown a negative relationship or no relationship at all. Findings from such a study would be important in decision making both from the side of a company’s board, which is charged with setting remuneration, and also for the shareholders who own the company. This research sought to study the application of this relationship in the Kenyan context, laying focus on companies listed in the Nairobi Securities Exchange. Using a sample of 30 companies, selected across the 11 main industries of the economy as categorized by the Nairobi Securities Exchange, a regression was done to determine the relationship between executive remuneration and firm performance. The dependent variable of the study was the executive remuneration while the independent variable was return on assets. The study also incorporated a control variable which was used as a proxy of other variables that affect the executive remuneration. In this case, it was firm size as measured by the average total company assets. After doing a regression of the dependent and independent variables, the study showed that there exists a positive relationship between the executive remuneration and firm performance as well as firm size. These findings point at the presence of an incentive scheme in Kenyan companies which is hinged on how the executives perform. The benefits of this study are that it opens up transparency on financial reporting of companies and in addition helps in steering the debate on issues such as fair remuneration vis a vis performance and how beneficial it is when it comes to ensuring that the shareholders goals are met. The study will also help in prompting the discussion on other factors that inform the payment of company executives and what weight should be applied to these factors when coming up with pay. Some of these considerations are: risk, level of skill, cash management, return on investment among other factors.