The Effect of Executive Compensation on Financial Performance of Listed Commercial Banks in Kenya

Abstract

Economic theory of executive pay has focused on the design of optimal compensation schemes to align the interests of managers and shareholders. Agency theory has identified several factors by which these interests may differ; including the level of effort exerted by the manager and problems resulting from the unobservabilty of the agent's relevant skills. This study examined the relationship between executive compensation and firm performance among the commercial banks listed at the Nairobi Stock Exchange. The study considered functional form relationship between the level of executive remuneration and accounting performance measures by using a regression model that relates pay and performance. The main objective of this study was to determine the effect of executive compensation on financial performance among listed commercial banks in Kenya. The study adopted descriptive research design. The target population comprised of the eleven commercial banks listed at the Nairobi securities exchange as at December 2017 as indicated in CMA bulletin 2017. The study employed secondary data extracted from audited financial statements and annual reports of individual listed commercial banks over the 6-year period, 2012 to 2017. STATA was used to tabulate and analyze the data. Percentages, means and frequency distribution tables were used to describe the data. Relationships between the independent and dependent variables were established by means of regression. The study established that executive annual bonuses, executive fixed salaries, executive allowances had a positive effect on financial performance of listed commercial banks while executive share ownership had a negative effect on the financial performance of the listed commercial banks in Kenya. Annual fixed salaries, firm size and capital structure has statistically significant effect on financial performance. Annual bonuses, executive allowances and executive share ownership did not show statistically significant influence on financial performance of listed commercial banks in Kenya. The study recommends that top management of listed commercial banks in Kenya should improve on executive compensation even though some of the variant of compensation may not improve financial performance that much.