Directors’ remuneration and firm performance in a study of Nairobi Stock Exchange listed companies

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.