The relationship between CEO compensation and company performance measurements of listed South African firms

Abstract

Some commentators argue that increased chief executive officer (CEO) compensation may lead to increased company performance, while others argue that increased CEO compensation does not necessarily lead to increased company performance. These different opinions led to several pay-performance studies to identify and analyse the relationship, if any, between CEO compensation and company performance. The motivation for the present study was to determine whether different performance measurements in a pay-performance study would provide different results, as well as to determine whether certain firms’ performance measurements correlate better to compensation than those of other firms. The main finding of the research was that there is a substantial difference in the correlational relationships identified between CEO compensation and company performance, depending on the performance measurement used. In this study earnings per share reported the strongest positive correlation at 0.89 and return on assets reported the strongest negative correlation at  -0.79 to CEO compensation. The findings suggest that researchers should carefully consider what performance measurement to use when conducting pay-performance studies as very different results could be delivered. In addition, stakeholders should take note of the specific performance measurement that they should apply if they want to negotiate a performance-based compensation system.