Executive Pay and Theoretical Approaches

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Sunday, August 02, 2020 / 07:00 AM / By Proshare Research / Header Image Credit: EcoGraphics


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The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently a warm personal gesture by the individual to himself. - John Kenneth Galbraith

 

There is a popular notion which postulates that it is the role of the executive directors of a company to create value and profits for the company. The question that arises in people's minds is; should executive directors receive an increase and performance-related remuneration if no value is created? Are executives paid what they are worth? Are compensation incentive structures effective in motivating executives to promote the interests of investors, employees, customers, and other stakeholders? Do current accounting and reporting standards provide adequate information on the effectiveness of compensation? Do economic theory and empirical evidence provide the appropriate framework for evaluating compensation decisions? Would a historical analysis provide a useful perspective for current and future requirements?


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Various theories have tried to explain the motives and factors that affect executive pay levels and make-up. The differences in the theories concerning their focuses for legitimizing arguments and the roles they give to pay resulted in a classification of 3 approaches; 1) the value approach, 2) the agency approach, and 3) the symbolic approach. The focuses of these approaches are regarding questions of how much to pay, how to pay, and what pay ought to represent or reflect, respectively.

 

The value approach's main arguments for legitimizing executive pay are based upon market mechanisms and market forces. The main contribution of this value approach is the insight it provides into how economic theory can contribute to a general understanding of markets and market inefficiencies in determining executive pay.  The value approach is incapable of providing explanations regarding questions around actual decisions on executive pay within a framework of corporate governance that at the same time address how corporate governance arrangements are organized within and outside firms.

 

The theories that comprise the agency approach, clearly indicate the importance of corporate governance arrangements at national and firm levels. Governance problems such as problems of agency, (ex-post) bargaining over (quasi-) rents, and governing transactions indicate the need for corporate governance mechanisms. However, the complete contracting view of the firm is too narrow and result in the inability to raise questions about the centralized institutional configurations in which a perfect contract is made up. According to the agency approach, explaining and hereby legitimizing executive pay is based on 1) the implication that executive pay is subject to risks and 2) possible discretionary powers of the actors involved.


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The symbolic approach provides additional insights into the concept of pay as a social phenomenon. Decisions on pay in this approach are based on an institutional approach. The symbol of certain pay levels and structures reflects the contextual role of an executive in the firm and/or in society. At the same time, and possibly also problematic within this approach, is the normative inclined social construction of pay levels and makeup.

 

Illustration 1: Executive Pay and Theoretical Approaches

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A more conclusive explanation of executive pay seems to rely on considering executive pay to be an outcome of pay-setting practices. Pay setting practices, those firm-level processes that serve to set, compare, and implement pay levels and structures, can differ from firm to firm and from country to country.

 

Illustration 2: Snapshot of Executive Remuneration Around the Globe

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There is significant variation in performance measurement practices from company to company, but some common themes emerge:

  • Profitability metrics are the most common measures of performance around the globe.
  • Most companies use more than one metric to measure performance in their annual incentive plans.
  • Strategic objectives are often used in combination with financial metrics.
  • Measuring results against absolute goals is more common than relative performance measurement.

The emergence of the coronavirus pandemic gives credence to the necessity to study the trends of executive remunerations in Nigeria and how CEO remuneration is likely going to be impacted. It is expected that the coronavirus pandemic will affect the revenues of firms listed on the Nigeria Stock Exchange and hence eat deep into CEOs' remuneration of top firms in Nigeria. Unlike in the previous year, where a majority of the top firm CEOs saw a rise in their annual remuneration, it is expected that these top firms will adjust pays from the top executives to the bottom staff to meet up with current realities of the economy.

 

There were no major changes in the top highest paid business executives from last year in Nigeria. Some of the notable changes include the spring forth of Nigerian Breweries executive as among the highest paid in Nigeria while Dangote cement CEO did not make the list as its Group Executive Officer Joseph Makoju retired as a board member of the cement maker.

 

The size of the average top corporate executive's wallet has had a fairly mixed relationship with the size of corporate turnovers and their profit before tax (PBT). The basis for the remuneration of executives could not be ascertained, as there was no distinct relationship between executive pay and the financial performance of organizations. For example, firms like Seplat recorded improvements in Profit Before Tax (PBT) while its highest CEO's pay declined.  Similarly, Unilever recorded a loss as high as N10bn but its CEO remained one of the highest-paid executives in Nigeria. 

 

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Downloadable Versions of 2020 Report (PDF)

1.      Executive Summary: CEO Remuneration 2020 Report - Paying the CEO in a Pandemic; The Unanswered Questions  July 30, 2020

2.     Full Report: CEO Remuneration 2020 Report - Paying the CEO in a Pandemic; The Unanswered Questions  July 30, 2020

 


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Previous Year's Report and Links

1.     CEO Remuneration 2019 Report: Making Sense of the Numbers for Listed Companies in Nigeria  July 30, 2019

2.     Full Report: CEO Remuneration 2019 Report - Making Sense of the Numbers for Listed Companies in Nigeria   July 30, 2019

3.     All Quoted Companies IR Pages - Proshare MARKETS

 

 


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Related News from CEO Remuneration 2020 Report

  1. Between 2019 and 2020: Understanding The New Realities of CEO Remuneration
  2. CEO Remuneration 2020 Report - Paying the CEO in a Pandemic; The Unanswered Questions

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