Abstract
The remuneration of CEOs presents companies with a multifaceted ethical dilemma. There exists a school of thought that the newer generation CEOs are increasingly rewarded with bigger remuneration packages, and that this raises concerns about the fairness, accountability and legitimacy of executive compensation decisions. On the one hand it is argued that very high remuneration is necessary to attract and retain top talent; on the other hand it is contended that CEOs are overcompensated relative to the work they perform. Moreover, the practice of linking executive remuneration to shareholder returns raises serious ethical concerns. The implementation of incentive-based compensation has, in fact, significantly contributed to the marked increase in executive directors’ remuneration over the past four decades.
Given that South Africa is widely recognised as the country with the highest wage inequality in the world (International Labour Organization 2018), it is unsurprising that there is growing criticism directed at the remuneration packages of South African directors. Although the relationship between corporate performance and governance has been examined in academic literature, limited research exists on the link between CEO compensation and company performance, specifically within South Africa’s banking sector. Considering the critical role that banks play in any economy, this study aims to determine whether a relationship exists between CEO remuneration and company performance in the South African banking sector. The alignment of executive compensation with shareholder interests is therefore regarded as a key benchmark in addressing potential ethical dilemmas. This research contributes to the existing body of literature by analysing the relationship between CEO remuneration and company performance.
The research sample comprises all listed South African banks over the period 2009 to 2022 and incorporates both market-based and accounting-based metrics to evaluate bank performance. Agency theory and optimal contract theory are employed to investigate the relationship between executive compensation and company performance.
Contrary to common expectations, panel data analysis reveals a positive and statistically significant relationship between executive remuneration and company performance within the South African banking sector. This finding aligns with international research, suggesting that bank performance plays a crucial role in determining executive compensation. Furthermore, the results indicate that enhanced remuneration packages may motivate executives to exert greater effort in maintaining long-term success or improving overall bank performance.
Nevertheless, caution is warranted, as other external or internal factors may also influence company performance. These findings therefore challenge prevailing concerns regarding the ethical implications of executive remuneration. In South Africa, where there is a shortage of high-calibre CEO talent, adequate executive compensation becomes imperative to attract and retain top performers.
It is recommended that South African companies implement an efficient remuneration structure, with long-term incentive plans that include a minimum vesting and holding period of five years. By adopting more transparent and equitable remuneration systems, companies can take proactive steps to reduce executive pay disparities and income inequality. This may include enhancing transparency in remuneration decisions, aligning CEO compensation with long-term corporate success, and incorporating clawback clauses for executives who engage in unethical or unlawful conduct. Such a remuneration policy should be designed with the company’s long-term sustainability in mind. Companies must ensure that they have mechanisms in place to recover or withhold variable compensation when appropriate.
This study recommends, first, that director remuneration should be adequate to attract and reward individuals of high calibre for the responsibilities they assume without being so excessive as to compromise their objectivity, judgement or independence. Secondly, executive remuneration should be determined in an objective and transparent manner, with clearly defined performance targets aligned with the relevant talent markets. Thirdly, a sizeable portion of executive compensation should be subject to a long-term vesting period (approximately 5 to 10 years). Finally, executive remuneration should not be based on the achievement of short-term objectives, but rather on the attainment of sustainable long-term corporate success, without encouraging excessive risk-taking.
Although this study focused solely on one ethical dimension of executive remuneration, namely whether such compensation is linked to company performance, proposed amendments to the South African Companies Act, Act 71 of 2008, aim to address additional ethical concerns, particularly those related to transparency. In terms of the recent amendments introduced by Act 16 of 2024, public companies are now required to disclose the following: (1) the total remuneration of the highest-paid employee; (2) the total remuneration of the lowest-paid employee; (3) the average total remuneration of all employees; (4) the median total remuneration of all employees; and (5) the ratio between the highest and lowest 5% of earners, also referred to as the 5/5 ratio.
This research, which focused on the banking sector listed on the Johannesburg Stock Exchange (JSE), found a positive relationship between company performance and executive remuneration within the South African banking industry. The findings offer insight into how challenges and limitations in the design of executive compensation can be addressed. The results are valuable in informing the development of standardised practices to regulate the perceived excessive compensation of CEOs in the South African banking sector.
Future research may expand this study by examining other sectors of the JSE or exploring logically grouped companies beyond the banking industry. Studies may also focus on specific sectors in other countries to provide comparative perspectives. Additionally, future research could further investigate the ethical dimensions of executive remuneration by comparing it to the compensation of other employees and assessing its monetary impact on firms and the broader South African economy.
Although IFRS2 (International Financial Reporting Standards regarding the reporting of share-based payments) has thus far been effective in governing share-base payment disclosure, the detailed reporting of directors’ remuneration continues to improve. Ongoing developments in IFRS will support and enhance future research in this area. It is further recommended that executive accountability to shareholders be strengthened through well-structured remuneration policies.
Keywords: agency costs; agency theory; banking sector; company performance; corporate governance; executive remuneration
- This article’s featured image was created by Andrea Piacquadio and obtained from Pexels.
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