Executive Compensation and Performance of Nigerian Manufacturing Firms: A Panel Vector Autoregressive (PVAR) Approach

Abstract

Some studies find positive relationship between executive compensation and corporate performance, but much of this literature are prone to endogeneity problem and common method bias.  Moreover, extant studies provide little information about potential moderating role of managerial power. This study tests the moderating role of managerial power, the degree to which the perceived executive power can influence executive compensation independent of corporate performance. In this analysis, we draw upon panel data from the manufacturing firms listed on the Nigerian Stock Exchange (NSE) during the period from 2010 to 2018. The findings indicate an inverse correlation between compensation and performance. Additionally, there is a positive association between firm size and compensation. The analysis also reveals that the correlation between compensation and performance becomes more pronounced when board size and the presence of non-executive directors influence performance metrics. No such evidence exists when the managerial power variables moderated return on equity. We conclude that consistent with the managerial power theory (MPT), information asymmetry, which gives executives more power relative to the board, makes it easier for executives to influence their compensation independent of actual performance and contrary to the postulate of the agency theory.

Keywords: Executive compensation, managerial power theory, agency theory, performance, PVAR

DOI: 10.7176/EJBM/17-1-03

Publication date: January 30th 2025