A Survey of the applicability of the principal-agent theory in Determination of the compensation packages used by commercial Banks in Kenya

Abstract

The purpose of this research was to find out the compensation systems uti! ized by commercial banks in Kenya, establish the determinants of the compensation system and the extent to which the principal agent theory can explain the variations in the payment systems. The population of the study was all commercial banks operating in Kenya. A sample was drawn form this population. The sample consisted of 8 commercial banks, which control over 80% of the market share. These are Barclays Bank of Kenya, Kenya Commercial Bank, Standard Chartered Bank, National Bank of Kenya, Co-operative bank of Kenya, Stanbic-CFC bank. Commercial Bank of Africa and Citi-Bank The structured questionnaire used in the study was coded with respect to questions for ease of electronic data processing prior to the commencement of the fieldwork. The data collected was analyzed using descriptive statistics. This involved the use of percentages, mean scores and standard deviation. Frequency tables were used for arraying data obtained to facilitate working out percentages in order to address the objectives of the study. Percentages revealed the proportions of different attributes being studied. According to the results oftbe survey, salary increments were tbe most frequently applied compensation systems for employees of banks in Kenya. This applied to both junior staff and middle level management staff. However, the executive directors compensation was in the form of salaries, performance based systems and bonuses. Holiday bonuses and executive life insurance cover were not applicable compensation systems. The findings of the study conclude that the principal agent framework does use bonus pay but only in part. It is undeniably true that the cost of measuring individuals output is important in explaining the use of bonus payor any other compensation system. The existence of alternative determinants of compensation system such as merit pay, stock price value, and company cash flow does not negate in itself the validity of th principalagent model.