Effect Of Managerial Compensation Schemes On Firm Performance for Investment Firms Listed At Nairobi Securities Exchange

Abstract

Previous studies on effects of executive pay have produced mixed results. Many studies on managerial compensation schemes focused on examination of relationship between managerial compensation schemes and firm performance, in developed countries but very little is known about managerial compensation schemes in developing nations particularly Kenya. This study has examined the effect of managerial compensation schemes on firm performance for investment firms listed at Nairobi Securities Exchange. The study has been guided by four objectives: To examine the effect of cash based compensation on firm performance for investment firms listed at Nairobi Securities Exchange, to determine the effect of stock based compensation on firm performance for investment firms listed at Nairobi Securities Exchange, to examine the effect of deferred compensation on firm performance for investment firms listed at Nairobi Securities Exchange and to find out the effect of long-term incentive plan on firm performance for investment firms listed at Nairobi Securities Exchange. The findings of this study will help the industry to understand how to regulate managerial compensation schemes to enhance firm performance. Three theories are utilized in explaining managerial compensation schemes and firm performance and these includes: Agency theory, Theory of competitive compensation and Goal Setting theory. The study has been conducted on all investment firms listed at NSE in 2017 and a sample of 53 has been used. A descriptive research design was employed with questionnaires as data collection instruments. A stratified sampling technique was adopted in selecting the required sample. Regression analysis was carried out and data entered into the computer and analyzed using SPSS. Results have been presented using frequency tables, pie charts and graphs. The study concludes that compensation based on cash, stock based, deferred compensation and long term incentive plan are associated with growth in profits, market share or generally performance of the investment firms. Regression analysis show that all the variables were less than 0.05 and this demonstrates that increase in firm’s profits is linked to managerial compensation.