Executive director pay, corporate governance and performance in South Africa: a simultaneous equation approach

This paper investigates the association between executive compensation and corporate performance using a sample of 169 South African listed firms from 2002 to 2007. It uniquely utilises a comprehensive set of corporate governance mechanisms within a three-stage least squares (3SLS) simultaneous equation framework. Results based on estimating a conventional single equation model indicate that the executive pay and performance sensitivity is relatively weak, whereas those based on estimating a 3SLS model generally suggest improved executive pay and performance sensitivity. Our findings highlight the need for future research to control for possible simultaneous interdependencies when estimating the executive pay and performance link. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, pay and performance proxies.