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The relationship between chief executive officer (CEO) remuneration and financial performance of an organisation
Orientation: In theory, effective remuneration contracts will link executive
remuneration with organisation financial performance and provide strong
incentives for executives to operate organisations and behave in ways that
will be in the shareholders’ best interests. Many proclaim that this is not
happening as CEOs continue to be rewarded even when their respective
organisations are performing poorly.
Research purpose: The purpose of this research study was to take
advantage of the available information on executive remuneration data and
establish the best link (correlation) between executive remuneration and
organisation financial performance between 2008 and 2012.
Motivation for the study: The motivation for the research study was due to
the acknowledged challenge encountered by organisations in finding a
balance between executive remuneration that will be enticing enough to keep
executives in the employ of the organisation and not overpaying them,
especially when organisation’s performance is not favourable.
Research design approach and method: The research was a quantitative,
archival study, conducted over a seven year time period. The primary
statistical techniques used in the study included: multiple correlation analysis,
bivariate regression analysis, multiple regression analysis and stepwise
regression analysis.
Main findings/results: The primary finding was that the relationship between
executive remuneration and organisation financial performance has been
experiencing a decline since the 2008 Global Financial Crisis. The decline
has predominantly been due to a move by executives away from performance
related elements of the remuneration contracts, creating disconnect between
what executives are being paid and the performance of the organisation. The
findings point out to the fact that, to a large extent, remuneration contracts for
executives are predominantly no longer shaped by what would be optimal for
an organisation and its shareholders, but are also influenced by the natural
propensity of executives to influence their own remuneration contracts.
Practical managerial implications: The results suggest that there is a need
for superior organisation performance measures and innovative remuneration
policies that need to be developed which will be in synchronism with the longterm
strategic plans of an organisation.
Contribution/value add: The study provides a key insight with regard to the
fact that without any performance based elements with the executive’s
remuneration, it is going to be difficult to justify the high remuneration
packages of executives. In the long run, a dilemma arises for board of
directors as they become reluctant to either reward executives for superior
performance or punish them for poor performance.