The relationship between Chief Executive Officer remuneration and financial performance in South Africa between 2006 and 2012

Abstract

Orientation: The relationship between Chief Executive Officer (CEO) remuneration and organisation performance has been a topic of close scrutiny, especially since the global financial crisis. Optimal contracting relies on the premise that effective incentives will link organisation financial performance and CEO remuneration in ways that will be in the best interests of both shareholders and CEOs.

Research purpose: The purpose of this research study was to investigate the relationship between CEO remuneration and organisation performance in South Africa between 2006 and 2012 and to determine whether the two constructs were positively correlated.Motivation for the study: The study provides an evidenced-based understanding of the nature of the CEO pay-performance relationship in South Africa. Understanding this relationship is critical to finding a suitable model to structure executive remuneration that will protect shareholders from over-remunerating executives in times of economic appreciation, whilst protecting executives from being underpaid in times of economic depreciation.

Method: The financial results and CEO remuneration of 21 of the top 40 listed companies on the Johannesburg Stock Exchange were analysed for the period 2006–2012. The research was a quantitative, archival study. The primary statistical techniques used in the study were correlation analysis and multiple regression analysis.

Main findings: The primary finding of the current research indicates that between 2006 and 2012 organisation executives have noticeably been moving away from focusing on short-termincentives, which are categorised as performance-related elements of remuneration packages.Based on these findings, it is evident that the relationship between executive remuneration and organisational financial performance has been experiencing a decline, especially since the 2008 global financial crisis. The decline has predominantly been due to a move away from performance-related elements of remuneration contracts by CEOs, creating a disconnect between CEO remuneration and organisational performance. The findings suggest that, to a large extent, remuneration contracts for CEOs are no longer optimal for the organisation and its shareholders, but are influenced by the propensity of executives to enhance their own remuneration. There exists a link between short-term incentives received by CEOs and accounting-based organisational performance measures; on the other hand, fixed pay linked with organisational performance measures continue to be eroded as organisations’ executives become more innovative as they are noticeably moving away from focusing on short-term incentives.

Practical/managerial implications: A stronger test of the pay-performance link and the power of incentive design are required in order to ensure that executives are rewarded or penalised for poor performance. The question of how executives are paid also needs to be considered.

Contribution: This research contributes to the literature on CEO remuneration by providing an evidenced-based understanding of the nature of the CEO pay-performance relationship in South Africa. Understanding this relationship is critical to finding a suitable model to structure executive remuneration that will protect shareholders from over-remunerating executives in times of economic appreciation, whilst protecting executives from being underpaid in times of economic depreciation.