The relationship between chief executive officer (CEO) remuneration and financial performance of an organisation

Abstract

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.