Relationship Between Executive Compensation and Financial Performance of Commercial State Owned Enterprises in the Energy Sector in Kenya
Abstract
Corporate governance scholars attempt to understand factors that underpin executive
compensation and if it enhances firm financial performance and subsequently firm
value. These studies have resulted into mixed and at times conflicting results. This
study therefore sought to determine the effect of executive compensation on financial
performance of commercial state owned corporations in the Ministry of Energy in
Kenya. This cross sectional study collected secondary data from published financial
statements of eight state owned commercial enterprises for a five year period from
2010 to 2014. The study finds weak negative associations between executive
compensation and financial performance on one hand and firm size and financial
performance on the other hand. The relationships are statistically significant. While
relating firm size and financial performance, the study establishes that 38.9 percent of
variations in financial performance is explained by variations in firm size such that a
unit increase in firm size has a commensurate decline in ROA to the extent of 0.062.
While relating firm size, executive compensation and financial performance, the study
establishes that 45.2% of variations in financial performance is explained by
variations in firm size and executive compensation. It is established that a unit
increase in firm size has a commensurate decline in ROA to the extent of 0.059 and a
unit increase in executive compensation has a commensurate decline in ROA for the
firms to the extent of 0.027. These findings that are consistent with earlier study
findings in different sectors confirm that high executive compensation is not a
prerequsite for corporate performance in the public owned corporations and there is
need for rationalization and harmonization to ensure that executive pay enhances
value for state corporation ownership. Assets utilization should also be investigated to
limit idle capacity and asset accumulation in the organizations. The study suggests
further inquiry using long period data that cater for different political and economic
dispensation that may also affect the performance of such entreprises.
Publisher
University of Nairobi