One of our top MBA theses on CEO renumeration (UP Space)

Effects of race on CEO pay-performance sensitivities

By Sean Barrett

Source: November 10, 2015


Orientation: The available literature has revealed a polarised picture regarding the effects of race on CEO remuneration. This division centres on whether race is a beneficial factor or not with regard to the level and sensitivity of remuneration received. Introducing South Africa’s affirmative labour policies and the growing societal calls to better explain executive remuneration creates the unique opportunity to examine the effects of race on CEO pay.

Research purpose: The purpose of the research centred on two important themes. Firstly the research sought to investigate the effects of race on the sensitivity of executive pay to corporate performance. Secondly the effects of race on the level and structure of executive pay was probed.

Motivation for the study: The primary motivation of the study centred on determining whether race is has an affect, if any, on the remuneration paid to CEOs in South Africa. This will assist in understanding whether the affirmative polices implemented in South Africa have made any impact in the top level of executive remuneration.

Research design: The study was designed to be quantitative, descriptive and longitudinal in nature utilising valid secondary data sources. The BFA Macgregor online financial database was selected as the most appropriate source of both corporate performance information and directors’ remuneration. Nineteen black CEOs were identified along with a random sample of 45 white CEOs. Following the data been analysed for reliability and validity it was then subject to primary and secondary statistical tests to determine significance and correlation strength. Main findings/results: All components of South African CEO remuneration studied were found to strongly correlate to PAT and EBITDA and to a lesser degree ROE and HEPS. ROE and HEPS have shown correlation strength growth in recent years. This collection of measures reflects a balanced basket of accounting-­‐based and non-­‐ accounting based measures. Black and white CEO mean remuneration when compared was found to have no significant difference due to race. A notable difference found was the higher degree of pay-­‐performance sensitivity and variability seen within the black CEO sample. Practical/Managerial implications: King III compels boards and remuneration committees to ensure remuneration of directors is fair and reasonable, sensitive to performance and aligned with the strategy of the organisation. Ensuring realistic pay-­‐ performance sensitivities are not just a corporate governance requirement but also help alleviate principle-­‐agent issues while correctly incentivising the CEO. Boards looking to appoint black or minority CEOs should continue to remunerate in a equitable and fair manner and be aware of such mental biases such as the “inverse Matthew effect” and other social out-­‐group biases especially when evaluating performance. Contribution: The study showed that race doesn’t affect the level of CEO remuneration but does impact on the pay-­‐performance sensitivity and the variability. The difference in sensitivity and variability could indicate the presence of mental biases such as the “inverse Matthew effect” and other social out-­‐group biases when evaluating performance.