The relationship between remuneration and financial performance for companies listed on the Johannesburg Stock Exchange

Elize Kirsten,Elda Du Toit

doi:10.4102/sajems.v21i1.2004

Abstract

Background: The executive directors of a company are the agents of the shareholders and should manage the company in the best interest of the shareholders, not only for personal gain. It is therefore important for companies to ensure that they implement remuneration policies which will result in motivated employees who will execute decisions and actions which are in the best interest of the shareholders. However, it is widely acknowledged that the relationship between company performance and executive remuneration is weak. This implies that executives are still rewarded excessive remuneration regardless of the performance of their companies. Aim: The purpose of this study was to determine whether a relationship exists between the performance-based remuneration of executive directors and the financial performance of South African companies. Setting: The study was conducted in South Africa, specifically on companies listed on the Johannesburg Stock Exchange. Methods: The study design was quantitative and made use of a Pearson correlation and generalised least squares regression with bootstrapping at a 95% confidence interval to analyse the relationship between executive director remuneration and the financial performance of 42 companies in the consumer goods and services industry of the Johannesburg Stock Exchange (JSE) from 2006 to 2015. Results: The study established that the remuneration policies in place for South African executive directors within the consumer goods and services industry seem to be affected by the share price of the company. Conclusion: In the South African environment, executive director remuneration is thus not directly related to profitability or company size, as was the case in some earlier studies. The link between executive director remuneration and share performance may be an indication that remuneration policies are based on the share price and are thus directly connected to the principle of shareholder wealth maximisation.

Highlights

Companies that give their executives the right rewards should outperform their peers under the right circumstances (Wilkinson 2009)
The main purpose of this study is to investigate the relationship between total executive director remuneration packages and the financial performance of South African companies listed on the Johannesburg Stock Exchange (JSE)
The results provide some interesting insights, such as that executive director remuneration is mainly related to the value of the company, rather than financial performance as shown in the financial statements

Summary

Introduction

Companies that give their executives the right rewards should outperform their peers under the right circumstances (Wilkinson 2009). Colvin (2008) emphasises that any form of compensation should relate to the performance of a company, because many chief executive officers (CEOs) are receiving excessive amounts of remuneration, often in the form of share options, despite their companies’ financial problems. It is important for companies to ensure that they implement remuneration policies which will result in motivated employees who will execute decisions and actions which are in the best interest of the shareholders. It is widely acknowledged that the relationship between company performance and executive remuneration is weak. This implies that executives are still rewarded excessive remuneration regardless of the performance of their companies

Objectives

Results

Conclusion