CEO pay-performance sensitivity in the South African context

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.

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

“…This is a unique approach, as most previous studies observed measures for size (in terms of turnover or net assets) and measures for profitability. More recent studies include those by Bussin (2015), Bussin and Blair (2015), Bussin and Modau (2015) and Bussin and Nel (2015). It is necessary to compare the results of our study with those of the majority of studies available.…”

“…The role of the CEO is pivotal in managing the resources of a company, especially in the context of a continuously changing external economic environment, to ensure value creation for shareholders. There is increased scrutiny levelled at the remuneration committees of companies, especially those that have increased CEO compensation, even when they face disappointing financial results (Bussin 2015). Gomez-Mejia, Tosi and Hinkin (1987) used CEO remuneration as a proxy for executive compensation and concluded that the payment of CEOs is more responsive to performance in companies that have dominant shareholders and are owner controlled.…”

“…According to Bebchuk and Spamann (2010), Fahlenbrach and Stulz (2011) and Bussin (2015), the global economic crisis was a result of dramatic disintegration in the market capitalisation of USA banks. Rajan (2005) suggests that the significant risks experienced by the global financial sector was, in part, a result of the compensation practices used within this sector.…”

Chief Executive Officer and Chief Financial Officer compensation relationship to company performance in state-owned entities

“…The CEO and CFO can be viewed as shareholder agents; thus, their primary role is to protect and grow shareholder value. Bussin (2015) notes that there are three different measurements of company performance, that is, absolute financial performance measures (verified measures of performance within a specific year), financial performance ratios derived from absolute financial performance measures and market performance measures, assessed through the share price performance of the company. Various agency theorists argue that multiple performance measurements can be used by principals in an optimal contract, for the principals to be able to fully understand the effort put in by the agent in achieving shareholder value.…”

“…Conyon and He (2014) posit that once principals have a full understanding of the performance measurements that best reflect the agent's effort, more sensible and precise measures can be consistently used in the optimal contract as an indication of the agent's effort. Goergen and Renneboog (2011) and Bussin (2015) argue that accounting-based performance measurements measure past performance and are subject to manipulation and thus might not be appropriate in determining executive past performance as rent-seeking CEOs are prone to manipulating the accounting measurements in order to achieve higher bonuses, evidenced by accounting scandals at Enron and Worldcom. According to Goergen and Renneboog (2011) and Wang and Xiao (2011), the most common accounting measures used to assess company performance are revenue, operating income or profit and earnings per share (EPS).…”