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

This paper investigates the association between executive director pay and corporate performance, as proxied by total shareholder return, 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 threestage least squares simultaneous equation framework. We examine the link between cash and equitybased compensation, as well as the association between both total CEO pay and performance and that between total pay of all executive directors and performance. Results based on estimating a conventional single equation model indicate that the executive pay and performance elasticity is relatively weak for South African firms, implying that the 2002 King Report’s attempt at linking executive director pay more closely to performance has not been completely successful. We also find that the executive pay and performance sensitivity is stronger for equity than cash-based compensation. Similarly, the results indicate that CEO pay is more sensitive to performance than those of lower placed executives. Distinct from existing studies, results based on estimating a three-stage least squares within a simultaneous equation model that dynamically allows for simultaneous interdependencies by taking into consideration a number of corporate governance mechanisms, generally suggest improved executive pay and performance elasticity. This highlights the need for future research to take into account 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 endogeneity, as well as different types of executive pay and performance proxies.