Assessing the relationship between performance and the directors’ remuneration in the Kenyan commercial banks

Date
2023
Authors
Lagat, H.
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
According to the agency theory, directors who represent shareholders may profit from the company by paying themselves high remuneration. Managers who get a set salary as their sole form of remuneration have no motivation to grow shareholder value because they are not entitled to any of the resulting gains. By making a portion of an executive's remuneration based on the company's financial performance, this incentive problem can be mitigated. The study was guided by agency and tournament theories. In Kenya, Companies Act (2015) requires that the directors’ remuneration should be based on the firm performance and that details of the directors' benefits should be included in the company's annual financial statement's notes. The study's objectives were first to determine the forms of directors’ remuneration; the second objective sought to examine compliance with the Companies Act, 2015 using key performance indicators namely return on assets, return on equity, liquidity, capital adequacy and credit risk, and lastly evaluate the non-financial characteristics to be considered in determining directors' remuneration. Both positivism and post-positivism research philosophies were used in the study and a multiple regression analysis covering the period 2015 and 2021 was also conducted. The study was both quantitative and qualitative and data was gathered using questionnaires for the case of non-financial data and annual reports for the case of financial data. To ensure reliability and affordability, the researcher used google forms to set up the questions and the link was shared with the respondents via email. Having thoroughly recognized all the sources, this study guarantees originality in the definition of the research and chosen content. The study findings indicated that executives receive retirement/ pension benefits, insurance benefits as well as bonuses while non-executive directors receive sitting allowance, travelling allowance, and a monthly fee. The findings showed that return on assets had a positive and significant impact on directors’ remuneration; capital adequacy and liquidity had a negative and significant effect on the directors’ remuneration; while return on equity and credit risk had no significant effect on directors’ remuneration. The findings further indicated that non-financial characteristics are critical in determining the directors’ remuneration. Finally, bank size is a significant factor when it comes to directors’ remuneration. The study recommends banks’ management should review policy on directors’ remuneration. Based on the findings, there is very weak relationship between bank performance and directors’ remuneration. The Central Bank of Kenya should review the Compliance Act (2015) to ensure that the directors’ remuneration is not exaggerated at the expense of shareholders. The banks’ management should strengthen the use of non-financial characteristics as determinants of directors’ remuneration. In particular, the study should focus on experience, qualifications, past track record, leadership skills, attitude and age. Keywords: Directors’ Remuneration, Performance and Non-Financial Characteristics
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Full - text thesis
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Citation
Lagat, H. (2023). Assessing the relationship between performance and the directors’ remuneration in the Kenyan commercial banks [Strathmore University]. http://hdl.handle.net/11071/15393