The relationship between South African CEO compensation and company performance in the banking industry

Abstract

This exploratory study is based on a statistical data analysis to determine whether a long-term correlation is present between South African CEO compensation and company performance in the banking sector. The detailed analysis, using a seven-year time period, is performed at individual company level as well as at sector level and includes two measures of company performance, namely market performance (share price) and accounting performance (return on equity, EBITDA and HEPS). The study is based on the agency theory, which postulates that linking CEO compensation to company performance is a means of reducing agency monitoring costs. It takes into account the historical and current trends in CEO compensation, including King III and its “say-on-pay” provision. Six out of seven null hypotheses were accepted in the study, indicating a long-term correlation between CEO compensation and variables such as company performance, average employee salary, general market performance and inflation. No correlation was found with company size.

Key words: CEO compensation, company performance, CEO remuneration, corporate governance, agency cost, agency theory, King III, banking sector, remuneration committee.