The Relationship Between Executive Compensation and Risk Among Commercial Banks in Kenya
Abstract
In the Kenyan environment, the executive compensation has not come under massive spotlight
perhaps due to the nature of CEO compensation. Unlike in the US, where publicly listed firms
are required to disclose information on top five executives’ compensation, Kenyan listed firms
have typically publicly disclosed only aggregated total compensation of a firm’s board of
directors. A major criticism of executive pay packages has been that they incentivize excessive
risk taking which contribute to the financial turmoil. Many studies when attempting to find
causal relationships between CEO pay and risk taking find mixed evidence. This level and type
of mixed results on the link between executive compensation and risk taking provides a strong
basis for this Kenyan specific study. This study takes a departure from such past Kenyan based
studies by incorporating assessing how risk taking is related to executive compensation.
This study used descriptive survey research design. The population of this study was all forty
three commercial banks and one mortgage institution licensed by the Central Bank of Kenya as
at 31st December 2011. This study used both stratified sampling and simple random sampling.
Stratified random sampling was used in each bank to group respondents into three strata. The
strata were those of executive management, senior management and middle management. Within
each of the three strata simple random sampling was done. Data on executive remuneration was
the average of four years (2008-2011) while primary data on the dependent variables was
collected through the questionnaire from July 2012 and concluded in August 2012. Data was
analysed using statistical package for the social sciences (SPSS).
The study found that executive compensation has insignificant relationship with risk taking
among commercial banks in Kenya. Risk taking was measured by use of non-performing loans,
money laundering, creative accounting and dividend pay-out. A further study to establish the
determinants of executive compensation among commercial banks in Kenya is therefore
recommended. The management of commercial banks should continue to enhance controls
within operational areas that can pose a risk to the bank. Management actions should continue to
be reviewed to ensure that they do not affect the banks business adversely
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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