Relationship Between Executive Compensation and Financial Performance of Commercial State Owned Enterprises in the Energy Sector in Kenya

Abstract

Corporate governance scholars attempt to understand factors that underpin executive compensation and if it enhances firm financial performance and subsequently firm value. These studies have resulted into mixed and at times conflicting results. This study therefore sought to determine the effect of executive compensation on financial performance of commercial state owned corporations in the Ministry of Energy in Kenya. This cross sectional study collected secondary data from published financial statements of eight state owned commercial enterprises for a five year period from 2010 to 2014. The study finds weak negative associations between executive compensation and financial performance on one hand and firm size and financial performance on the other hand. The relationships are statistically significant. While relating firm size and financial performance, the study establishes that 38.9 percent of variations in financial performance is explained by variations in firm size such that a unit increase in firm size has a commensurate decline in ROA to the extent of 0.062. While relating firm size, executive compensation and financial performance, the study establishes that 45.2% of variations in financial performance is explained by variations in firm size and executive compensation. It is established that a unit increase in firm size has a commensurate decline in ROA to the extent of 0.059 and a unit increase in executive compensation has a commensurate decline in ROA for the firms to the extent of 0.027. These findings that are consistent with earlier study findings in different sectors confirm that high executive compensation is not a prerequsite for corporate performance in the public owned corporations and there is need for rationalization and harmonization to ensure that executive pay enhances value for state corporation ownership. Assets utilization should also be investigated to limit idle capacity and asset accumulation in the organizations. The study suggests further inquiry using long period data that cater for different political and economic dispensation that may also affect the performance of such entreprises.