Academic journal article SA Journal of Human Resource Management

The Relationship between Chief Executive Officer Remuneration and Financial Performance in South Africa between 2006 and 2012

Academic journal article SA Journal of Human Resource Management

The Relationship between Chief Executive Officer Remuneration and Financial Performance in South Africa between 2006 and 2012

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Key focus of the study

The primary challenge in the executive pay-performance relationship is finding a mutually beneficial balance between executive remuneration and organisational performance. This challenge is compounded by the fact that there is no universally accepted understanding of the strength and significance of the relationship. In addition, the measurement of organisational performance is itself open to interpretation with a variety of conflicting indicators suggested as valid and reliable. The lack of clarity in the understanding and measurement of the constructs within the executive payperformance relationship makes the creation of a model to structure executive remuneration difficult. A longitudinal, evidence-based understanding of the relationship between executive pay and organisational performance is necessary to determine a meaningful and optimal model of executive remuneration.

Background to the study

Chief Executive Officers (CEOs) assume the highest levels of responsibility and accountability for an organisation and its performance on behalf of the organisation's shareholders (Kaplan, 2013; Wibowo & Kleiner, 2005). These individuals are typically highly skilled, have significant leadership competencies and are viewed as a scarce resource. As a result, these executives are highly incentivised through remuneration structures to remain in the employ of the organisation and drive the performance of the organisation. In order to ensure that there is alignment between the CEO's interests and those of the shareholders it is important for shareholders to design and employ a pay-performance model that is proven to deliver this alignment.

There is a well-recognised challenge in finding a balance between remuneration that will be enticing enough to keep executives in the employ of the organisation without overcompensating them when organisation performance is not favourable (Bebchuk & Fried, 2005; Marais & Lefifi, 2013). There have been calls from governments, trade unions and civil society to curb what is perceived as exorbitant executive remuneration in light of increasing levels of relative poverty and inequality, especially in countries like South Africa (Marais & Lefifi, 2013). The 2008 global financial crisis has placed executive remuneration even more directly in the spotlight due a perceived weak payperformance link.

According to researchers such as Shaw (2011) and Bebchuk, Cohen and Holger (2010), executive remuneration has been widely regarded as one of the key contributors to the financial crisis. This sentiment has found its way into academic literature as researchers try to understand more fully the root causes of the 2008 global financial crisis.

Much criticism has been levelled at organisations and their remuneration committees for increases in executive remuneration in the face of disappointing financial results (Lindqvist & Grunditz, 2004). The amount of legislation and regulation in dealing with executive remuneration has subsequently increased, supporting remuneration contracts that reward superior organisation performance (Morrissey, 2009).

Research purpose

In South Africa, the Companies Act (Act No. 71 of 2008) and King Code and Report on Governance in South Africa (King III; Institute of Directors Southern Africa, 2009) specify that there should be a positive correlation between CEO remuneration and organisation performance, and associated disclosure requirements have also increased (Institute of Directors Southern Africa, 2009). The purpose of this research is to investigate whether there is indeed a positive correlation or not between CEO remuneration and company performance, especially in the biggest companies listed on the Johannesburg Stock Exchange.

Trends from the research literature

There are empirical findings that support both a relationship between CEO pay and organisational performance, as well as little or no relationship. …

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