The Relationship between Executive Compensation and Financial Performance of Insurance Companies in Kenya

Abstract

This paper sought to assess the effect of executive compensation on the financial performance of insurance companies in Kenya. The study considered functional form relationship between the level of executive remuneration and key performance ratios by using a regression model that establishes the relationship between pay and financial performance. The results show that there is a non-significant relationship between executive compensation and financial performance, P-Value>0.05. The negative correlation suggests the capping of executive compensation to maximize shareholders returns. This advocates that key performance ratios are not key considerations in determining executive compensation among the insurance companies in Kenya. Hence there is need to sensitize executives to align their payment to accounting performance measures because they are directly linked to shareholder’s wealth maximization. The study’s findings are useful to managers in insurance companies for strategic planning. The arguments of this study are based on the agency theory and review of relevant literature.

Keywords: Executive, compensation, financial performance, agency theory, corporate governance, Key ratios