Executive pay and corporate performance in South Africa: the moderating effect of corporate governance

Ntim, Collins G., Lindop, Sarah, Osei, Kofi A. and Thomas, Dennis A. (2010) Executive pay and corporate performance in South Africa: the moderating effect of corporate governance Southampton, GB. University of Southampton

Abstract

This paper examines the crucial question of whether corporate governance (CG) can moderate the pay-for-performance sensitivity (PPS) using a sample of 169 South African listed companies from 2002 to 2007. Examining direct links between executive director pay and performance, we find a positive but weak PPS, which provides support for the managerial power hypothesis (MPH). However, and consistent with the predictions of the optimal contracting theory (OCT), we also find that the PPS improves in firms with strong governance. Specifically, the PPS appears to be stronger in firms with greater block ownership, higher institutional ownership and more independent remuneration and nomination committees, but weaker in firms with larger boards and CEO duality. Our evidence implies that CG has a significant moderating effect on the PPS. This sheds new insights on the predictions of the OCT and MPH. The findings are generally robust across a raft of econometric models that address different types of endogeneities, executive director pay, and performance proxies.


Keywords Executive Director Pay . Performance. Corporate Governance . South Africa . Endogeneity . Causality


JEL Classification G32 . G34 . G38

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Contributors

Author: Collins G. Ntim

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