Abstract
In an attempt to address the growing gap between chief executive officer (CEO) remuneration and that of the general worker, reign in rising CEO remuneration, and justify the portion of long-term incentive pay that makes up the bulk of CEO remuneration, shareholders and other stakeholders are trying to find definitive factors that will link CEO remuneration to company performance. Finding this link has become central to all executive remuneration issues. The results of the studies linking CEO remuneration to company performance are varied and inconclusive, particularly in South Africa. The reason for this is that previous studies have not looked at whether the company performance measures chosen have definite relationships with CEO remuneration in each industry. This study investigated eleven financial indicators of company performance to determine which of them have significant and positive relationships to CEO remuneration in different industries in South Africa. 254 South African listed companies, spread over 5 industries, were analysed for the period 2008 to 2012 using panel data analysis and statistical tests. The results were conclusive, finding performance metrics that had a positive and significant relationship to CEO remuneration in 4 of the 5 industries investigated, as well as over the aggregate of all the industries.
Highlights
There is a growing perception that the remuneration of chief executive officer (CEO) has become detached from the performance of the companies they manage (Bebchuk, 2009)
A grey background indicates a positive result – i.e., it contains information which supports the argument that there is a relationship between long-term portion of CEO remuneration and that particular performance metric
The most promising relationship exists between Change in Share Price and the long-term incentives (LTI) portion of CEO remuneration, supported by Gomez-Mejia and Tosi (1994) who concluded that CEO remuneration was linked to share price but not to any other company performance indicators
Summary
There is a growing perception that the remuneration of CEOs has become detached from the performance of the companies they manage (Bebchuk, 2009). The King III codes on corporate governance were brought into effect in South Africa in 2010 (IODSA, 2009). The Code for Responsible Investing in South Africa (CRISA) is a “stewardship code” detailing the responsibility of institutional shareholders to look after the interests of individual investors or policy holders (IODSA, 2011). It advocates that shareholders “should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character”. It is imperative that LTIs should be directly linked to long term sustainability measures of company performance (IODSA, 2011). The study covers six broad industries and concrete conclusions are presented for each
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