The impact of remuneration governance on chief executive officer overpayment

Mark H.R. Bussin · Albert Wöcke · Benno Deysel

19 citations0/0 files storedSouth African Journal of Economic and Management Sciences

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Corporate Finance and Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

Background: Chief executive officer (CEO) payment and company performance are highly controversial, and existing research has focused on this link for decades. The study was conducted in South Africa where corporate governance regulators have introduced measures to improve the relationship between CEO pay and performance. Aim: This research aimed to explore the problem by extending Pepper and Gore’s ( 2015 ) behavioural agency theory to examine the moderating effect of remuneration governance on the CEO pay – company performance relationship. Setting: The study focused on the Top 100 listed companies in which several regulations concerning CEO pay were introduced, which provided the opportunity to examine such regulations on the alignment of CEO pay and company performance. Method: Panel data from 67 company annual reports were analysed over two decades with 871 datapoints, divided into three periods corresponding with the introduction of regulations. Analyses included corrected panel standard errors and estimated generalised least squared hierarchical multiple regression and moderated multiple regression analyses. Results: Results showed a statistically significant positive relationship between company performance measures and total CEO remuneration (including long-term incentives [LTIs]) for each of the three periods. We found that LTIs tied to performance-vested criteria and CEO minimum shareholding do enhance pay-performance sensitivity. Results further suggest that the behavioural agency theory is incomplete and researchers should consider the role of remuneration governance in moderating CEO overpayment. Conclusion: Remuneration governance should be refined through the inclusion of retrospective CEO remuneration disclosure to increase pay-performance sensitivity. Contribution: This research contributes to knowledge of CEO payment and company performance.

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1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Separation of Ownership and Control 1989Agency Theory: An Assessment and Review 1980Agency Problems and the Theory of the Firm 1988Management ownership and market valuation 2010Signaling Theory: A Review and Assessment 1990Performance Pay and Top-Management Incentives 1983Agency Problems and Residual Claims

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