Chief Executive Officer’s Performance and Compensation: Astudy of Firms Listed in Nairobi Securities Exchange

Abstract

This study focused on the role of Chief Executive Officers’ (CEOs’) Performance, Power, Firm Size and CEO’s Compensation at the firms listed with the Nairobi Securities Exchange (NSE). Previous research examined the factors influencing CEO compensation revealed a lack of consensus on the explanation of CEO’s level of compensation. While most of the studies confirm association between CEO’s Performance and Compensation, they measured Performance using financial indicators. The current study investigates association of CEO’s Performance and their remuneration but differs from previous ones by expanding the measures of CEO’s Performance to include the “balanced scorecard measures of financial indicators, consumer satisfaction, internal processes and learning and growth”. Additionally, the study tested the moderating role of CEO’s Power and Firm Size in the relationship between CEO’s Performance and their remuneration. This study was supported by “Reinforcement Theory, Agency Theory and Expectancy Theory”. A conceptual model and four conceptual hypotheses were drawn from literature and provided direction for this study. The study’s population consisted of sixty firms listed at the NSE. Descriptive crossectional survey was adopted in the study. Primary data was obtained from members of the board of directors on factors that determine levels of CEO’s Compensation using semi structured Likert questionnaire. Secondary data on financial performance was captured from the financial statements of the listed organizations for the period 2016- 2018. Descriptive statistics, correlation analysis, linear, multiple and hierarchical regression techniques were applied in analyzing and interpreting the data that was collected. The first hypothesis for the study was that CEO’s performance influences CEO’s compensation. The research outcomes revealed a significant and positive relationship between CEO’s Performance and their Compensation. The second hypothesis tested the moderating effect of power on the association between CEO’s performance and their compensation. The study revealed that CEO’s power had a significant but negative moderating influence on the association between CEO’s Performance and their Compensation. The third hypothesis tested moderating effect of firm size on the association between CEO’s performance and remuneration. The results revealed that Firm Size had a significant moderating influence on the association between CEO’s Performance and their Compensation. Joint effect of CEO’s Performance, Power and Firm Size on their remuneration was also significant. The findings of this study can be of benefit to boards of directors in identifying the performance measures that are important to consider when making decisions on CEO remuneration. It will also help them understand the influence of a powerful CEO with a good performance in the determination of their compensation. Based on this the board can formulate a policy on good governance to distinguish the powers of the CEO from those of the board. Future researchers could consider increasing the span of the study to embrace firms that are not listed at the NSE.