The Relationship Between Executive Compensation and Firm Performance in Kenya Banking Industry

Abstract

The study sought to examine the relationship between executive compensation and firm performance. The study considered functional form relationship between the level of executive remuneration and accounting performance measures by using a regression model that related pay and performance. From the findings, the existence of the pay-performance puzzle was evident, more so, with regard to smaller banks. The study negates the role of performance in determining executive compensation, given the inverse and non-significant relationship between pay and performance among large banks. The study concludes that among the large Kenyan banks accounting measures of performance are not key considerations in determining executive compensation and that size is a key criteria in determining executive compensation as it was significantly but negatively related to compensation. The negative correlation suggests the capping of executive compensation to ensure maximization of returns to shareholders. As such, the interests of the executive directors are subordinated to those of the shareholders in keeping with the agency theory.