The relationship between executive compensation and financial performance of insurance companies in Kenya

Abstract

A manager whose compensation consists entirely of a fixed salary would have no incentive to increase shareholder wealth because the manager does not share in any of the resulting gains. This incentive problem can be reduced by making part of an executive’s compensation depend upon the firm’s financial performance. The study examined the relationship between executive compensation and financial performance of the insurance companies in Kenya. The specific objectives of the study were to examine the relationship between executive compensation and financial performance of insurance companies in Kenya and to characterize the executive compensation schemes among the insurance companies. The population of the study consisted of all forty eight (48) insurance companies registered with Insurance Regulatory Authority that have been in existence during the five year period to 2010. Secondary data was collected from Insurance Regulatory Authority annual reports. The study considered functional form relationship between the level of executive remuneration and key performance ratios by using a regression model that relates pay and performance. The study found a non-significant positive relationship between executive compensation, Capital adequacy and solvency margin ratios since P>0.05. Further the study found a non-significant relationship between claims and expense ratios since P>0.05. The negative correlation suggests claims and expenses to be prudently managed to maximize shareholders returns. This implies that the performance ratios are not key considerations in determining executive compensation among the insurance companies in Kenya. This study recommends sensitization of executives to align their payment to financial performance measures because they are directly linked to shareholder’s wealth maximization. Further, the results showed that, more than 66% of Kenyan insurance companies characterize executive remuneration into basic salary, fringe benefits and bonus plans while less than 42% characterize into stock options, Longterm incentives plan and golden parachutes.