Corporate performance and management compensation: An empirical investigation of public companies in Kenya.

Abstract

Agency theory regards management compensation as the main means of aligning the interest of shareholders and management to ensure sustained value creation to shareholders. To explore this argument, this study examined the components of management compensation and the associated proportions as well as the relationship between management compensation, performance and sales using a sample of 41 public companies for the period 1994 - 1998. Return on Assets and Return on Equity were used to proxy performance. Salary was found to be the main element of management compensation accounting for 70% of total management compensation. Allowances, pensions and loans accounted for 14%, 7% and 6% respectively. The relationship between management compensation and performance was found to be negative and statistically insignificant. The negative relationship indicated that management compensation had not contributed to the reduction of agency costs for public companies in Kenya. Sales were found to be positively and significantly related to management compensation.