The Relationship Between Executive Compensation and Capital Structure of Firms Quoted in the Nairobi Securities Exchange

Abstract

share price return (SPR) have significant and positive impact on executive compensation. The public anger over the hefty pay to executives of firms that nearly were bailed out by government during the financial crisis elicited concerns over excessive risk taking by executives. In this study the researcher uses the capital structure of the firms as a proxy for risk taking by executives. The study’s objectives were to establish relationship between the executive compensation and capital structure of the companies listed in Nairobi Securities Exchange and whether this relationship varies with the size of the firm and the industry in which the firm operates. The researcher undertook an empirical cross sectional survey. The target population for this study comprised of all 44 listed companies in the Nairobi Securities Exchange main market segment as at 1st January 2007 and secondary data was collected from the annual reports of the publicly listed companies. A Multiple Regression model was conducted using Statistical Package for Social Sciences (SPSS) on the total executive compensation and accounting based measures of firm’s capital structure, the firm size measured by natural log of sales and a dummy variable to denote the industry of the firms. Research findings indicate that the model had accounted for 24.7% of the variance in total executive compensation over the five year study period (2007 - 2010). The research finds that capital structure (DE), Firms size (FS) and industry (DV) have no impact on executive compensation. Management share ownership (MSO) and share price return (SPR) have significant and positive impact on executive compensation.