Relationship between Executive pay and company performance in South Africa

Thumbnail Image

Date

2017

Authors

Nemakololwe, Thizwilondi Steven

Journal Title

Journal ISSN

Volume Title

Publisher

Abstract

ABSTRACT The purpose of this multi-level study is to establish whether there is a relationship between executive pay and company performance. The study finds that CEO and Director pay is strongly linked to both accounting and market performance measures when analysing publicly listed companies within the Consumer Goods and Services sectors. CEO and Director pay respond to current and previous company performance levels. Consequently, the impact of a significant change in performance on CEO and Director pay decays over time. This non-linear relationship is characterised by a short-term response of pay to performance and a cumulative response which is generally much larger than the short-term response. A change in return on equity (ROE) has a positive cumulative impact on pay that decays over a 2 to 3-year period. A change in return on assets (ROA) has a positive cumulative impact on pay that can be either higher or lower than the short-term impact. This response characteristic highlight that an increase in ROA is associated with high pay levels in the shortterm; however, it may be associated with pay levels that are not much higher than the original pay levels in the long-term. The cumulative response of CEO and Director pay to a change in market performance can be observed over a 2 to 4-year period as a significant component of pay is linked to market returns. CEO pay is more sensitive to company performance as compared to Director pay. The response of CEO pay to a change in market returns starts to decay after two years, whereas the Director’s response decays from the outset. The study also find that company size may explain initial differences in CEO and Director pay levels; however, subsequent changes in pay levels are more influenced by company performance. The results of this study support the optimal contracting theoretical perspective which assume that the Board of Directors use measures of performance to align CEO and Director pay to shareholders’ wealth. Consequently, the observed pay level is a complex outcome of the gains and losses that emanates from these arrangements. These arrangements may result in periods where pay seem to be decoupled from company performance. Future studies should consider methods that can fully characterise the dynamic nature of the pay-performance relationship.

Description

M.B.A. Thesis

Keywords

Executives -- Salaries, etc. -- South Africa, Corporations -- South Africa -- Finance.

Citation

Collections

Endorsement

Review

Supplemented By

Referenced By