Abstract
The topic of executive pay-performance sensitivity has resulted in mixed research findings. Literature related to executive remuneration constructs, company performance measures and the underlying theories is critically reviewed in this article. The literature is compared to research findings within the South African context pre, during and post the Global Financial Crisis of 2008. The researcher found similar results in the South African context compared to research in other countries and industries. The research challenges the notion that there is one dominant theory driving CEO compensation. The principal-agent theory, supported by the optimal contract theory, are foremost during periods of strong economic performance, while the influence of managerial power and other behavioural theories appear to prevail during periods of weak economic performance. This article proposes some critical considerations in order to manage this tension.
Highlights
Introduction and literature reviewIn 2008 the financial services industry went into a liquidity crisis; Lehman Brothers and Bear Stearns were decimated, while other banks received government bail-outs
The role that incentive remuneration played in causing the financial crisis is evident in the significant corporate governance and regulatory changes that have occurred since the economic recession of 2008
Research done into the factors driving changes in remuneration policies in South Africa, showed that financial results of the company, governance and merit pay are key factors that are receiving closer attention; reflecting a greater shareholder expectation that pay should be linked to performance (Bussin & Huysamen, 2003; Bussin & Satram, 2012)
Summary
In 2008 the financial services industry went into a liquidity crisis; Lehman Brothers and Bear Stearns were decimated, while other banks received government bail-outs. Cohen & Spamann (2010) indicated that executives in the financial services industry, and in particular at Bear Sterns and Lehman Brothers, were well compensated despite the risks that eventually led to the downfall of both companies and the global recession that ensued. Former IMF chief economist, Raghuram Rajan (2005), tabled a controversial paper suggesting that compensation practices in the financial sector were creating significant risks for the global financial system. He stated that executives in the financial sector received substantial incentive pay-outs despite engaging in business practices that eroded company performance, threatened company sustainability and the entire financial system in the long-term. Based on the differing outcomes regarding CEO’s salaries, it is evident that there is a challenge in finding a balance between remuneration that will attract and retain CEOs but not over pay them, especially when company performance is not favourable
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