CEO’S COMPENSATION AS A FUNCTION OF FINANCIAL PERFORMANCE, CUSTOMER SATISFACTION AND FIRM’S INTERNAL PROCESSES: MODERATING EFFECT OF FIRM SIZE IN KENYA
Purpose of Study: This study addressed the influence of firm size on the relationship between financial performance, customer satisfaction and internal processes as predictor variables on CEOs compensation as a criterion variable. Previous researches reveal lack of consensus to explain sharp increases in CEOS’ compensation. This study contributes to the ongoing debate by re-looking at the factors that influence CEO’S compensation levels. It re-examines organizational performance measures and their influence on CEO’S pay and introducing firm size as a factor that moderates this relationship.
Methodology: Agency theory forms the foundations of this study. A conceptual model for the study was drawn from the literature. The study’s population comprised 65 firms listed at the NSE. Descriptive cross-sectional survey was adopted. Respondents were members of the boards of directors of the firms. Four directors, comprising about 50% of the board members randomly selected from each firm and constituted a pool of informants for the study. Primary data was collected on customer satisfaction and internal processes using a semi structured questionnaire. Secondary data was collected on firm’s financial performance from the financial statement of the listed organizations and on CEO’S compensation for the 2017 to 2018 period. Descriptive statistics, Pearson’s Product moment correlation analysis, multiple and stepwise linear regression were used to analyze the data and test hypothesis.
Results: The findings showed that firm size had a significant moderating effect on the relationship between financial performance, customer satisfaction, internal processes as predictors and CEO’s compensation as criterion variable.
Conclusion and policy recommendation: The findings of this study are of benefit to board members of organizations in identifying the performance measures that are important to consider when making decisions on CEO remuneration and to pay attention to firm size in making CEO remuneration decisions. The findings of this study underpin the importance of firm size and performance in CEO’S compensation decision at the level of policy and practice.
Keywords: CEO Compensation, Organizational Performance, Firm Size
Baptista, M. (2010). CEO Compensation and Firm Performance in France. HEC, Paris Thesis
Baron, R. M. and Kenny, D.A. (1986). The Moderator-Mediator Variables Distinction in Social Psychological Researcch: Conceptual, Strategic and Statistical Considerations, Journal of Personality and Social Psychology, 51 (6), 1173-1182
Benchuk, L.A., Gristein, Y. and Peyer, U.C. (2010). Lucky CEOS’ and lucky directors. Journal of Finance 53(4), 123-145
Bernardin, J. (2007). Human Resource Management, an Experiential Approach, 3rd Ed, Tata McGraw-Hill Publishing Co., New Delhi.
Eisenhardt, K. M. and Schoonhoven, C. B. (1996). Resource-based view of Strategic alliance formation; Strategic and social effects in entrepreneurial firm, Journal of Organization Science Vol. 7(2), 136 - 150.
Finkelstein, S. and Hambrick D.C., (1989). Chief Executive Compensation: a study of the intersection of markets and political processes, Strategic Management Journal, 10(2), 121-134.
Gabaix, X. and Landier, A. (2008). Why has CEO pay increased so much? Quarterly Journal of Economics, 123(1), 49-100.
George, D., and Mallery, P., (2003). SPSS for Windows Step by Step: A simple guide for reference, 4th Edition, Boston, Allyn and Bacon.
Hubbard, G. (2009). Measuring Organizational Performance: Beyond Triple Bottom Line. Business Strategy and the Environment, 18(3), 177-191.
Jensen, M.C. and Meckling, W.M. (1976). The theory of the firm: Managerial behavior, agency costs and ownership structure. Journal if Financial Economics, 3(4), 305-360.
Kaplan, R.S. and Norton, D.P. (2000). The Strategy-focused organization: How balanced scorecard companies thrive in the new business environment, Harvard business school press, Cambridge.
Kimberly, J.R. (1976), Organizational size and structuralist perspective: A review, critigue and proposal, Administrative science quarterly, 21(4) 571-597.
Sigler, K.J. (2011). CEO Compensation and Company Performance. Business and Economics Journal, 31(1), 1-8.
Skinner, B. F. (1965). Science and human behavior (No. 92904). Simon and Schuster.
Trigueiros, D. (2000). A theoretical definition and statistical description of firm size, International Journal of Economics, Vol 6, pp 159-164
Vroom, V.H. (1964). Work and motivation. Wiley.