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