The relationship between CEO compensation and company performance measurements of listed South African companies

Abstract

Some commentators argue that increased chief executive officer (CEO) compensation may lead to increased company performance, while others contend that increased CEO compensation does not necessarily cause increased company performance. These different opinions generated several pay-performance studies to identify and analyse the relationship, if any, between CEO compensation and company performance. The aim of the present study was to investigate the relationship between CEO compensation and a wide range of performance measurements of listed South African companies. The study was based on quantitative, empirical and archival research on secondary data over a period of 10 years, namely 2006–2015. Statistical techniques were used to perform a correlation analysis. Additional objectives were to determine whether different performance measurements in a pay-performance study would provide different results, and also to determine whether certain companies’ performance measurements correlate better to compensation than those of other companies’ performance measurements. The main results of the study were that there is a substantial difference in the correlational relationships identified between CEO compensation and company performance, depending on the performance measurement used. In this study earnings per share showed the strongest positive correlation at 0.89 and return on assets reflected the strongest negative correlation with CEO compensation at -0.79. The results suggest that researchers should carefully consider what performance measurement to use when conducting pay-performance studies, as very different results could be delivered. In addition, stakeholders should take note of the specific performance measurements that they should apply if they want to negotiate a performance-based compensation system.