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 study: 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.Research 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.
Highlights
Key focus of the studyThere has been a marked increase in executive pay, and there is recognition that remuneration arrangements are no longer aligned with the interests of the shareholder (Frydman & Jenter, 2010)
When considering the metrics used to define company financial performance, the results observed in this research supported the consensus of the previous studies for five of the six metrics
The results of this study showed that there was no significant relationship observed between total executive pay and return on equity (ROE) in the total dataset
Summary
There has been a marked increase in executive pay, and there is recognition that remuneration arrangements are no longer aligned with the interests of the shareholder (Frydman & Jenter, 2010). This may be because of flaws in the governance processes that dictate the arrangements (Bebchuk & Fried, 2005). Murphy (1998) noted that if executives were only paid a fixed salary, there would be little incentive to improve company performance because they do not get paid in relation to the performance. More recent literature indicates that there appears to be a trend towards the pay strategy of executives moving away from http://www.sajhrm.co.za. There seems to be a conflict between the patterns regarding the structuring of executive pay.
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