The relationship between director remuneration and performance of firms listed in the Nairobi Securities Exchange

Abstract

The agency problem has been a source of great interest in corporate governance to both industry and academic researchers. Various proposals have been advanced to resolve the agency problem, with most of the suggestions having been incorporated into corporate governance principles and best practices that companies are encouraged to apply. However, despite advances in development of corporate governance best practices, the agency problem still persists. In Kenya, companies that are listed on the Nairobi Securities Exchange are required to comply with the corporate governance principles that are issued by the capital markets authority, which require management remuneration to be based on performance.

The purpose of the study is to establish the relationship between management remuneration and firm performance for companies that are listed on the Nairobi Securities Exchange. The study adopted a descriptive research design. The population of the study was the companies listed at the Nairobi Securities Exchange. Data was obtained from published audited financial statements covering the period between 2006 and 2010. Regression analysis demonstrated a positive link between management remuneration, ROE, EAT and Tobin's Q as measures of firm performance.

The study concludes that among Kenyan companies, management remuneration has a weak relationship with ROE and Tobin's Q, but a moderately strong positive relationship with EAT. The implication of this finding is that, among Kenyan listed companies, directors remuneration is strongly linked to raw performance indicators as opposed to measures of efficiency of utilization of shareholder funds and market performance. These findings therefore point towards high possibility of agency problem since directors can benefit themselves by maximizing raw earnings without due regard to long term performance and market performance.