Directors’ remuneration and firm performance in a study of Nairobi Stock Exchange listed companies
Date
2010-12
Authors
Injeni, Geoffrey Ikavulu
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
Under the agency theory, directors who act as agents of shareholders may benefit
from the company by awarding themselves high remuneration. To resolve this
problem, some authors have recommended corporate governance principles which
include a requirement to pay directors based on firm performance. Examples of pay
based on firm performance include bonuses and stock options. In Kenya, companies
listed on the Nairobi Stock Exchange (NSE) are required to comply with the corporate
governance principles issued by the Capital Markets Authority (CMA), which require
directors’ remuneration to be based on firm performance. The purpose of the study
was to find out first, whether there is a relationship between directors’ remuneration
and firm performance for Nairobi Stock Exchange companies, and secondly, the
components of executive pay together with the key factors that determine executive
pay. A regression analysis involving 37 NSE listed companies covering the period
between 2003 and 2008 showed the majority of the companies reported a weak
positive relationship between executive remuneration and firm performance (when
measured by Revenue Growth, Net Profit Margin, Return on Investment, Return on
Equity and Earnings per Share), and a weak negative relationship between executive
remuneration and stock market returns (measured by Share Price Growth). In
addition, an analysis of 23 respondents from the 37 companies also found salaries,
fees and other benefits to be the key components of executive pay. Majority (60%) of
the respondents mainly consider experience and qualifications to be the key factors
that determine executive pay. The study has confirmed the inconsistency of pay based
performance in Kenya. The study has also highlighted the key determinants of
directors’ remuneration for companies listed on the NSE. Further studies can be done
to establish the challenges of implementing performance based pay in NSE
companies. In addition, further research can be done on performance based pay for
small and medium sized firms and in the public and private sectors.
Description
Keywords
Agency theory, Corporate governance, Directors’ remuneration, Firm performance, Nairobi Stock Exchange