Relationship between executive pay and company financial performance in South African state-owned entities

Abstract

ORIENTATION : Executive pay has been increasing; however, company performance has not been increasing proportionally. This could be due to an agency problem, resulting in executive pay not aligning with the shareholders’ desired company performance. RESEARCH PURPOSE : The purpose of this research was to establish if there was a relationship between the total pay of the chief executive officer and their company’s financial performance in South African Schedule 2 state-owned entities (SOEs). MOTIVATION FOR THE STUDE : A review of literature revealed conflicting views regarding the relationship between executive pay and company financial performance. There were limited studies conducted in South Africa, especially considering SOEs. RESERACH APPROACH/DESIGN AND METHOD : This research was a quantitative, archival study using 8 years of secondary data from South African Schedule 2 SOEs. Spearman’s rank-order correlation was used to evaluate the relationship. MAIN FINDINGS : One significant weak positive relationship was observed when considering the net profit or loss metric of financial performance. Hence, there was no conclusive relationship between executive pay and company financial performance, which supported the proposition that there is an agency problem in South African SOEs. PRACTICAL/MANAGERIAL IMPLICATIONS : There is a distinct need for an all-encompassing SOE legislation framework to standardise pay structure and reporting requirements. Additionally, accurate measures of performance are necessary to overcome the agency problem. CONTRIBUTION/VALUE-ADD : This research adds to the limited knowledge base regarding the relationship between executive pay and company financial performance in South African SOEs. It also identified the need to incorporate non-financial metrics to influence executive pay.