The Relationship Between Executive Compensation and Firm Performance in Kenyan Banking Industry

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

The bonus plan hypothesis is that managers of firms with bonus plans are more likely to use accounting methods that increase current period reported income. Such selection presumably increase the present value of bonuses if the compensation committee of the board of directors does not adjust to the method chosen

It was reasonable for a CEO’s compensation to increase as the company expanded and became a larger entity, and the newly-granted shares and increasing stock options further aligned the CEO’s personal interests with those of the company and shareholders. In this sense, the second compensation package was also well-structured and not excessive. Seeing Sunbeam’s revenue rising and stock price climbing steeply upwards, Sunbeam’s shareholders and directors were fully convinced by Dunlap’s leadership, so they might perceive the increase in compensation amount necessary to retain and better motivate Dunlap to enhance the company’s value. Nonetheless, they neglected the fact that the increased portion of the equity-based compensation also further motivated the CEO’s dangerous behaviors pertaining to improper earnings management.

It follows that aggregate pay and risk can be normally corresponded even in an established classical principle-agent model with exogenous firm risk where CEOs actualise the ideal exertion for the benefit of shareholders and where entrenchment is truant. To put it plainly, the outcomes of this research propose that firm risk is by all accounts a first-arrange determinant in the cross-segment of which firms repay their managers profoundly. This option account accentuates that managers’ compensation must be adjusted for working at high-risk firms. The entrenchment story for the most part suggests that enhancing administration and lessening the wedge between the interest of administration and shareholders would have restricted danger in the framework, and maybe even have maintained a strategic distance from the financial crisis (Cheng and Jose

Given the effect a CEO can have on a company's success, we can understand why their compensation packages

We believe the new incentive system was needed and reasonable because the accounting-based incentive system, where EPS was a measure of performance, raised valid concerns. The first being an agency problem. This existed within the old system as manager’s interests were not aligned with those of stockholders. EPS had improved steadily at a rate of 9% annually; however, the share price had increased only slightly in comparison. Therefore, the company’s stockholders had hardly benefited. The second issue was the use of subjectivity in granting bonus awards. These awards were given out even when their entity had not performed well. Managers began “politicking”, meaning they would try and convince their evaluators they performed better than the results had shown.

No instances were observed where management’s policies regarding compensation included extreme incentives. Compensation is in line with industry standards and management bonuses are based solely on achievement of short-term performances. Due to the conservative nature of management’s financial reporting practices, there is not an obsessive focus on short-term reported results. To further reduce temptations of potential incentives, performance is tracked against budgets and quarterly forecasts to monitor changes. The board of directors also actively exercises its oversight capacity in compensation related issues. Final approval of all

A large theoretical literature, based on agency theory, has emphasized how firms design compensation contracts make employees to do their best for the firm. Therefore, firms include many different mechanisms (i.e. piece rates, options, bonuses and stocks, budget targets) in their compensation contracts to align interests between the employees and their managers. However, objective measures are not perfect and using only these is unlikely to be the most effective way to motivate employees (Feltham & Xie 1994; Hemmer 1996). Financial measures provoke a reallocation of activities toward those that are directly compensated and away from the uncompensated activities, known as multitasking problem (Holmstrom & Milgrom, 1990, Baker 1992). They have been criticized for promoting over-emphasis on short-turn financial results, and thus, they sacrifice long-turn (Ittner et al., 1997, 2003).

The compensation has changed drastically and will continue to change in correlation to the cultural change in the market place. Prior research finds that financial analysts often issue biased earnings forecasts to please firm management (Ke & Yu, 2006). Companies started looking hard at who is part of the compensation pool and what type of compensation will be the best to facilitate the retention of the best. The problem companies face is how to keep the best in their mist but at the same time not fall under the same issues that Sarbanes-Oxley try to fight off. The Sarbanes-Oxley challenge has prompted some public companies to all but do away with stock

Evolutions of annual compensation are coming from 1990 to 2007 in Australian market to present the literature survey and their annual compensation for the highest three payment paid. The fast development of Executive pay has received with the help of incensement of dramatic compensation of economic market in Australia in between the 1995 and 1997 (Song, 2000). These annual growth has grown in a dramatic way to fulfill the economic value in Australian market, which compares them across the world. This annual rate has grown 10% with the help of all individual data analysis and the stakeholder’s compensation. It also implies the stock market and its values in 2004 by contributing the popularity of stock options (Lazear & Oyer, 2004). He said about the shift attention of stock value including their attention in the academic literature for further research process, which is needed to determine the stakeholder’s causes and penalty. The incensement of stock option including CEO has paid the basic needs to account for the important changes of structural payment. This stock option has risen from $0.6 to $1 million over the same period. The important components of CEO have already received a surveying period and literature payments. This observation has been coming by obtaining information of difference comprehensive which forms the payment structure of stakeholders. Strong growth has occurred in the middle year in executive remuneration from 1990s to 2007.

indicate that employees with high equity are more likely to engage in earnings management and reporting earnings that meet or beat analysts’ forecasts. find that employee holding more options and stock shares are more likely to manipulate reported earnings through discretionary accruals which is consistent with. also identify that the sensitivity of employee stock option to stock price is

Making a good compensation plan will motivate the managers. Bad compensation plan could influence the company’s development and damage the shareholders’ value (Gordon&Kaswin, 2010,p2). The XXX Ltd want to design a compensation plan which can attract and retain the executives needed to achieve and its objective of establishing an industry-leading company with high operational performance and maintain shareholders’ value. The issues addressed in this compensation plan is how to protect shareholders’ value via the compensation contract and compensation plan components: Base salary, cash compensation& benefit,. Nevertheless, in order to determine the different portion of the each component, basic salary survey and performance associated with target accomplishment should be guided the payment model selection.

While there is heterogeneity in the payment practices between companies, executive compensation plans must include four basic components: base salary, annual bonus tied to accounting performance or another agreed indicator between the parties, stock options and incentive plans long term (including restricted stock plans and performance plans based on accounting more exercise). Under the crossfire of public opinion, the bonus word became almost word, synonymous with unbridled greed, something to be fought. But despite all the weeping and gnashing of teeth the last two years, the variable compensation was off the list of fatal victims of the crisis. Capitalism still could not invent better way than the bonuses to reward those who deliver the

The Agency theory arises when business-unit managers want to maximize their bonus potential by act in their own self-interest by booking larger discretionary expense accruals. Bonner et al. (2000), indicates that bonuses have the most positive effects upon employees’ incentives. This problem will tarnish the accountability of manager (agent) towards the organization (principal). Managers will ignores the principal’s value and focuses more on short term financial numbers in order to maximize their bonuses.

Therefore, managers or directors mean to depict good performance and position by manipulating figures hence in such way the stakeholders will be shown positive indicators from the financial statements. By this way, investors will more likely to be attracted and given confidence with this superb financial report. This can be achieved by modifying the figures in the statements using the tricks of creative accounting. In addition, how many bonuses directors will receive in a year may base on the percentage of the profit reported (Shafren, 2009). For this reason of their private interest, directors may manipulate financial figures to meet their desire. Lttner, Larcker and Rajan (1997) have the same perspective. They illustrate that when the directors or managers private interest (such as stock options and bonuses) is rely on the performance of the company, they are more likely to use creative accounting to manipulate the figures in order to achieve their favourable results.