Corporate Governance, Firm Performance, and CEO Compensation

BABALOLA Olufisayo; IBITOKUN Oludolapo Atinuke; Umoru Bashiru; ONYENEKWE Florence Ifeoma

BABALOLA Olufisayo
IBITOKUN Oludolapo Atinuke
Umoru Bashiru
ONYENEKWE Florence Ifeoma

Abstract

Corporate governance is crucial for shaping policies and decisions in emerging economies like Nigeria. A key focus is executive compensation, which should align executives' interests with those of shareholders to boost firm performance. However, in many developing markets, weak governance, high executive pay, and limited accountability raise doubts about the effectiveness of these compensation systems. The effect of corporate governance and firm performance on CEO compensation in Nigeria remains underexplored mainly, especially within the non-financial sector, which constitutes a significant part of the Nigerian economy. Non-financial firms operate across diverse sectors with unique regulatory and competitive landscapes, making it essential to investigate how board structures impact CEO compensation within this context. This study examined the influence of corporate governance and firm performance on CEO pay among listed Nigerian non-financial firms, utilising a panel dataset of 28 firms spanning 2011 to 2023. Guided by agency theory, the study explores how board attributes—precisely board and board independence—and corporate performance metrics, measured by return on enterprise value and assets (ROA), influence CEO compensation. Employing the System Generalised Method of Moments for analysis, the results reveal that firm performance significantly positively affects CEO compensation. In contrast, board size shows no significant impact, while board independence negatively affects CEO compensation. These results highlight the nuanced interplay between governance mechanisms and executive remuneration in the Nigerian corporate context. Based on the findings, the study recommends empowering shareholders with voting rights on CEO compensation packages during annual general meetings to ensure alignment between executive pay and shareholder interests, fostering improved corporate accountability.

Keywords: Agency theory, CEO, Enterprise value, Return on Assets