The relationship between executive compensation and dividend payout: evidence from the Nairobi Stock Exchange
Understanding dividend behavior has been a major research problem for financial economists for decades. The objective of this study is to establish the relationship between executive compensation and dividend payout among the firms listed on the Nairobi Stock Exchange market. The study used a longitudinal survey design. The strength of a longitudinal study is its capacity to study change and development. Given that this study wished to collect secondary data on executive compensation and dividend policy over time, a longitudinal approach was deemed the most appropriate. The population of interest consisted of firms listed on the Nairobi Stock Exchange. The study period was 6 years from 2003-2008. A sample of 44 firms was therefore used. Data was analyzed using multiple-regression analysis through the SPSS package. The study found that executive compensation had a positive effect on dividend payout. These findings imply that the more the management is compensated, the more they retain the earnings. Thus, the study concludes that managerial compensation does not motivate managers to pay out dividends. This relationship was found to be statistically insignificant and there may be other factors that affected much of the variance in dividend payout. The study recommends that the issue of dividend policies is still unresolved as there is still a mixed view on what can better explain dividend policies. Majority of past studies have shown a negative link while the present study finds a positive link. For this reason, there is need to explore this matter more with various other models. These results have important implications to the shareholders. As it was noted that managerial compensation does not motivate the managers to pay more dividends to the shareholders, it may be important for the management compensation to be re-looked into. More studies need to be done in this area since there is still much unresolved on what motivates managers to pay out dividends.