The relationship between executive remuneration and company performance in South Africa.

Abstract

Executive remuneration has been the subject of close scrutiny, huge public outcries and criticisms in the recent past. This has invariably attracted unprecedented research interest across different sectors of the economy. This research study examined CEO remuneration-company performance relationship in the South African context. The focus was to determine if these two constructs were correlated and aligned with the corporate governance principles as postulated in the optimal contracting theory. The study was therefore motivated by the desire to provide data-based evaluation of the existence, nature and magnitude of CEO pay-performance sensitivity. Ultimately, this sought to contribute to the creation of an efficient executive remuneration package design model. To this end, an archival quantitative research approach was adopted. Secondary data for CEO remuneration and company performance metrics of the JSE listed entities were statistically analysed. For results’ interpretation, descriptive, regression and time series statistical analyses were performed. Study findings confirmed the existence of a positively linked relationship between CEO remuneration and company performance in South Africa. Based on regression analyses, the overall relationship was found to be weak to moderate. It was however found that market based company performance measures (Share price and earnings per share) had stronger influence on executive remuneration determination. The research further confirmed the existence of two key total remuneration components, fixed guaranteed pay and performance based short-term incentives, respectively. Whilst CEO remuneration was found to be fixed pay-biased, structural shift towards a more variable pay-dependent remuneration structure was however observed over the six year study period. These research findings were viewed as an affirmation of the positive influence of the new corporate governance and legislative measures (King III and Companies Act (2008)) in ensuring clean corporate governance in South African companies. The expectation is therefore to strengthen the envisaged positive link between executive remuneration and corporate performance, whilst addressing the contentious issue of income disparities between company CEOs and their ordinary employees.