The relationship between executive renumeration and credit risk of banks listed in Kenya

Kinyanjui, Brenda Wangechi
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Strathmore University
The collapse of the financial system in 2008 brought into light the strong impact that executive remuneration had in the management of credit risk in banks is the United States. The relationship of agency looks at executive pay as a mode of linking the interests of shareholders to that of management. This study attempts to reveal the relationship between the measures of credit risk and executive remuneration and give an overall assessment of the impact of executive remuneration on credit risk in Kenyan banks. It will enable shareholders be able to know to what extent they can use executive remuneration to control credit risk in banks. It can also be used by the government to ensure proper credit risk management in banks for the sound health of the financial system. A panel data from eleven listed commercial banks in Kenya covering a seven year period (2008-2014) was analyzed within the random effects framework. The results from this study find a positive but insignificant relationship between credit risk and executive remuneration. The study can be extended to include the structure of executive remuneration especially with the introduction of a derivatives market in Kenya and the possibility of the inclusion of share options in the pay structure of management.
Submitted in partial fulfillment of the requirements for the Degree of Bachelor of Business Science-Finance at Strathmore University
Credit risk, Executive remuneration, Agency, Banks, Kenya