The Relationship Between Directors Remuneration And Financial Performance Of Companies Quoted At The Nairobi Securities Exchange

Abstract

Director or executive remuneration has always been a major subject for debate in the US, Europe, Asia and even in Africa’s emerging markets. The issue also got a lot of attention after the Enron scandal in 2001 as Enron’s compensation and performance management system was designed to retain and reward its most valuable employees, however it led to a dysfunctional corporate culture that led to it bankruptcy. Under the agency problem directors act as agents of the shareholders and received high pay. To resolve the agency problem many writers have recommended corporate governance principles including tying directors pay to firm performance. Companies at the Nairobi Securities exchange are required to comply with corporate governance principles issued by the Capital markets Authority. The purpose of this study was to find out if a relationship exists between director’s remuneration and firm performance and also to test the significance of this relationship. A regression analysis of the 62 companies at the Nairobi stock exchange was conducted to establish the relationship and significance between director’s remuneration and firm performance. 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 study found a negative but non-significant relationship between director’s remuneration and firm performance. The study recommended that directors compensation and performance measures need to be disclosed publicly especially for the publicly traded companies.