The Relationship Between Financial Performance and Executive Compensation of Commercial Banks in Kenya

Abstract

At the centre of shareholder wealth maximization has been the need to align the efforts of management and executives to those of the shareholders. This has led to design of various executive compensation schemes to reward management and motivate them to work harder. Over the years there has been need to ascertain the determinants of executive compensation paid to management and the relationship if any to financial performance and hence if the conflict of interest is minimized and their interests aligned then both management and shareholders will benefit from an improved financial performance of their corporation. The study sought to determine the relationship between financial performance and executive compensation of commercial banks in Kenya where it considered a functional form relationship between the financial performance as measured by return on equity and executive compensation using a regression model which found a positive but insignificant relationship between financial performance and executive compensation of commercial banks in Kenya thereby suggesting that accounting measures of performance like return on equity are not key determinants of executive compensation for commercial banks in Kenya. This suggests that commercial banks should incorporate other factors like risk, size of the bank, skill, quality and experience of the executives to determine their optimal compensation needed to align their interests to those of shareholders. Keywords: Executive Compensation, Financial performance, Commercial banks