Executive remuneration and its effectiveness as an instrument to generate company growth in South Africa

Van Der Linde, Gideon Charl (2007-12)

Thesis (MBA)--Stellenbosch University, 2007.

Thesis

ENGLISH ABSTRACT: This is an introductory research into executive remuneration and its effectiveness as an instrument to generate company growth in South Africa. This research is based on the assumption that there is a direct relationship between company performance and growth, and directors' remuneration. Companies employ directors in an attempt to increase value to shareholders. Remuneration paid to directors is sometimes viewed as excessive. To determine whether executive remuneration is excessive, various elements have to be taken into account. These elements vary, depending on the point of view of the analyst. This research is based on the point of view of the shareholder. A remuneration strategy can be deemed effective when elements important to shareholders have shown a positive change relevant to the change in directors' remuneration. Thirty-eight companies have been sampled. The proxies of the ROA ratio as well as the share price growth have been used. It is apparent that of the companies sampled, the majority has an effective executive remuneration strategy in terms of driving company growth and performance. In 18 instances a change in directors' remuneration (seen in isolation) resulted in an outright benefit to the company. This change was an increase in directors' remuneration in 15 of the companies sampled. In three of the companies sampled, this change was a decrease in directors' remuneration. Interpreting the results of the sample data, within the ambit of the proxies used, the conclusion is that in these instances the executive remuneration strategy has been used as an effective instrument to generate company growth. In eight instances a change in directors' remuneration (seen in isolation) did not result in any benefit to the company. Six of these changes were an increase in directors' remuneration. Two of these changes were a decrease in directors' remuneration. Interpreting the results of the sample data, within the ambit of the proxies used, the conclusion is that in these instances the executive remuneration strategy had not been used as an effective instrument to generate company growth. In 12 instances a change in directors' remuneration (seen in isolation) resulted in some kind of benefit to the company. Ten of these changes were an increase in directors' remuneration . Two of these changes were a decrease in directors' remuneration . Interpreting the results of the sample data, within the ambit of the proxies used, the conclusion is that in these instances the executive remuneration strategy had been used as a partially effective instrument to generate company growth. The proxies of the ROA ratio as well as the growth in a company's share price can therefore be used to determine the effectiveness of a company's executive remuneration strategy in driving company growth and performance. These proxies can be used if the assumption is made that there is a relationship between company growth and performance and executive remuneration. Executive remuneration alone does not drive company growth. There are numerous other factors at playas well. Executive remuneration should, however, be closely scrutinised so that it is optimally used. Executive remuneration should be incentivised in such a way that increased remuneration results in an increase in the ROA ratio as well as in market related growth in the share price over a period of time.

AFRIKAANSE OPSOMMING: Hierdie is inleidende navorsing in uitvoerende bestuur se vergoeding en hul doeltreffendheid as 'n instrument om groei te bewerkstellig vir maatskappye in Suid-Afrika. Hierdie navorsing is gebaseer op die aanname dat daar 'n direkte verwantskap is tussen opbrengste en groei van maatskappye en die direkteursvergoeding. Maatskappye betrek direkteure om waarde vir beleggers te vermeerder. Direkteursvergoeding word soms beskou as oordadig. Om te bepaal of hierdie besoldiging oordadig is, moet verskeie aspekte in berekening gebring word. Hierdie aspekte verskil vanuit die oogpunt van analis tot analis. Hierdie navorsing is gebaseer vanuit die oogpunt van die aandeelhouer. 'n Besoldigingstrategie kan as suksesvol beskou word as die aspekte wat belangrik is vir die aandeelhouer positief verander het, teenoor die verandering in die direkteursvergoeding. Die resultate van 38 maatskappye is gebruik. Die opbrengs op bates verhouding en die groei in aandeleprys is as maalstaf gebruik. Oil blyk dal die meerderheid van maatskappye waarvan inligting gebruik is, wei 'n effektiewe uitvoerende besoldigingstrategie het in terme van maatskappygroei en opbrengste vir aandeelhouers. In 18 gevalle was die verandering in direkteursbesoldiging (in isolasie beskou) 'n direkte voordeel vir die maatskappy. Hierdie verandering was 'n vermeerdering van besoldiging in 15 gevalle. In drie gevalle was die verandering in besoldiging 'n vermindering . Interpretasie van die navorsing, met verwysing na die maatstawwe wat gebruik is, dui daarop dat (in hierdie gevalle) die uitvoerende besoldigingsstrategie as 'n effektiewe instrument gebruik is om maatskappygroei teweeg te bring. In agt gevalle was die resultaat van 'n verandering in direkteursbesoldiging (in isolasie beskou) nie tot voordeel van die maatskappy nie. In ses gevalle was die verandering in direkteursbesoldiging 'n vermeerdering. Twee van die veranderinge in direkteursbesoldiging was 'n vermindering. Interpretasie van die navorsing, met verwysing na die maatstawwe wat gebruik is, dui daarop dat (in hierdie gevalle) die uitvoerende besoldigingstrategie onsuksesvol as 'n effektiewe instrument gebruik is om maatskappygroei teweeg te bring. In 12 gevalle was die resultaat van 'n verandering in direkteursbesoldiging (in isolasie beskou) tot die een of ander voordeel van die maatskappy. In 10 gevalle was die verandering in direkteursbesoldiging 'n vermeerdering. In twee gevalle was die verandering in direkteursbesoldiging 'n vermindering. Interpretasie van die navorsing, met verwysing na die maatstawwe wat gebruik is, dui daarop dat (in hierdie gevalle) die uitvoerende besoldigingstrategie gedeeltelik suksesvol as 'n effektiewe instrument gebruik is om maatskappygroei teweeg te bring. Die maatstawwe van die opbrengste op bates verhouding en die van groei in aandeleprys kan dus aangewend word om die doeltreffendheid te bepaal van die uitvoerende besoldigingstrategie om maatskappygroei en opbrengste teweeg te bring. Hierdie maatstawwe kan gebruik word indien die aanname gemaak word dat daar 'n verwantskap is tussen maatskappygroei en opbrengste sowel as die uitvoerende besoldiging wat betaal word. Die uitvoerende besoldiging is nie die enigste faktor verantwoordelik vir maatskappygroei nie. Daar moet noukeurig gelet word op uitvoerende besoldiging sodat dit optimaal aangewend word. Uitvoerende besoldiging moet tot aansporing dien sodat meer besoldiging aanleiding gee tot 'n vermeerdering van die opbrengste op bates verhouding sowel as markverwante groei in aandeleprys oor 'n periode van tyd.

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