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-term
incentives, 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
PRACTICAL/MANEGERIAL 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.