ESE Theresa Esenohor, Yakubu Abubakar, Orogun E. Simeon
College of Education, Warri
Abubakar Yak & Co Chartered Accountants
College of Education, Warri
Abstract
This study examines the impact of directors’ remuneration on financial performance of selected quoted firms in Nigeria. The study has been conducted in different parts of the globe and in Nigeria with different findings which are mixed and inconclusive. The population of the study consists of ten (10) firms quoted on the Nigerian stock exchange as at 31st December 2021 out of which ten (10) firms were selected as samples for a period of Ten (10) years from 2012 to 2021 based on purposeful sampling technique. The study uses Correlation matrix and OLS regression as tools for analysis and adopted the correlational research design. The study shows that Directors’ remuneration has a positive significant impact on financial performance of quoted selected firms in Nigeria.
Keywords: Directors, Remuneration, Leverage.
Introduction
Director Remuneration plays an important role in firms especially it impacts on firm’s financial performance.Directors’ remuneration is the full package of compensation received by a director from a company. It is seen beyond the salary, but can also include bonus payments, stocks, options to buy stocks, and other benefits. Tax consequences can restrict the way directors’ remuneration is calculated based on relevant legislations imposed on Companies. According to Ab Razak (2014), Directors’ remuneration is the payment made for services or employment of directors on the board of a company or corporation. Directors may be compensated by fee, salary, and or use of the company’s property as an agreement between them and the company. However, the amount of remuneration cannot exceed the amount specified in the articles of association (AOA) as stated in company law. Akter (2020) opined that Directors` pay will certainly impact positively on firm performance if the payment mechanism effectively elicits/incentivizes the board to do so. Thus, a positive impact of pay on performance indirectly reflects whether directors are paid for performance. On the other hand, the high levels of an interrelation exist between and within the remuneration packages for CEOs and board of directors with the indicators of corporate performance. The results showed that performance indicators and remuneration packages are positively correlated with each other (Aslam, Haron& Tahir 2019). Empirical studies conducted on the Directors Remuneration and financial performance which include studies Herdan & Szczepanska (2011), Ab Razak (2014), Razali, Yee, Hwangi, Tak, & Kadri (2018), Akter, Ali, Abedin, & Hossain, (2020) of are largely foreign. Most of studies conducted in Nigeria to the best of our knowledge concentrated on insurance firms, deposit money banks and Hospitality firms which could not provide adequate evidence on the impact of Directors remuneration on financial performance as far as selected firms in the Consumer goods and oil and gas sectors are concerned. Those studies have provided mixed and inconclusive findings due to the data collected, methodology used and the industry used and to the best of our knowledge, among studies conducted in Nigeria, we have not seen a study that took into consideration the selected quoted firms from Consumer goods and Oil and gas sectors. To this end, this study attempts to fill the gap by examining the impact of Directors remuneration on financial performance of selected quoted firms of Consumer goods and Oil and gas sectors in Nigeria. The main objective of the study is to examine the impact of Directors Remuneration on financial performance of quoted selected firms in Nigeria. The Specific objective of the study are to determine the extent to which Directors remuneration impact on financial performance of quoted selected firms in Nigeria. In line with the specific objective, a hypothesis was formulated which is: HO1 Directors remuneration has no significant impact on financial performance of quoted selected firms in Nigeria.
Literature Review
Many studies have been conducted on the impact of Directors remuneration on financial performance. Herdan & Szczepanska (2011) opined the impact of Directors’ Remuneration and Companies’ Performance of Listed Companies in Poland and Uk. They said that companies size, accounting factor and market factor are three factors that affect CEO compensation.. They looked at the relationship between each of this factors and directors remuneration. Sample of companies listed on London Stock Exchange (LSE) and Warsaw Stock Exchange (WSE) for the period of 2007 – 2010. Data were collected through annual reports content analysis and announcement on websites of LSE and WSE. Linear regression was run on collected data. The results of the findings showed a positive correlation between directors’ remuneration and companies’ size in both British and Polish listed companies. There existed also a positive relationship between directors pay and companies performance. Ab Razak (2014) investigated the relationship between director’s remuneration, corporate governance structure and performance of a sample of 150 companies listed on the Bursa Malaysia from year 2008 until 2013. Sample was selected to provide matched-pair of government linked companies (GLCs) and non-government linked companies (non-GLCs), as it was anticipated that these group would have different governance structure, the key difference being government ownership. The result holds even when we control for company specific characteristic such as corporate governance, company size, leverage, director’s remuneration, board size and auditors. They used panel based regression model to examine the impact of government control mechanism on company performance using two important measurers. Accounting based measure was proxies by ROA and non-accounting based measured by Tobin’s Q. The result of the study showed a significant impact of government ownership on company performance after controlling for company specific characteristics. Lawrence (2020) examined the impact of directors’ remuneration on firms’ performance of Thirteen (13) commercial banks listed on the Nigerian Stock Exchange from 2010 to 2017. Descriptive Statistics, Correlation Matrix, and the Ordinary Least Square Regression Techniques were used in analyzing the related data set. The results of the study revealed that there is no significant relationship between directors’ remuneration (proxy as directors’ salary and bonus share) and firm’s performance in terms of shareholders’ value of Tobin Q, among listed banks in Nigeria. Razali, etal (2018) examined the Impact of Directors’ Remuneration and Firm’s Performance: A Study on Malaysian Listed Firm under Consumer Product Industry. Firm performances are measured by return on assets (ROA) and return on equities (ROE). A sample of 40Malaysian listed companies for the period of 2012to 2014 was employed. After controlling forboard size, CEO duality, firm size, firm age and leverage, the results of the study revealed that director remuneration has positive relationship with firm performance measured by ROA and ROE. The result also shows all variables affect firm performance differently. Ahmed, Bahamman, & Abdulkarim (2020) examined the effect of directors’ remuneration on financial performance of listed insurance companies in Nigeria. Data was gotten from annual reports and accounts of listed Insurance companies in Nigeria from 2012 to 2017. The Population of the study was all 28 insurance companies listed on the floor of the Nigerian stock exchange market, out of which 19 insurance companies were randomly selected as sample for the study. Data was analyzed using pooled OLS, fixed and random effects regression. It was found that directors’ remuneration is positively and significantly related to financial performance at 10% level of significance. On the interaction variables, it was found that the presence of more independent directors on the board strengthens the positive impact of directors’ remuneration on firm performance. Otekunrin etal (2018) studied the impact of Directors Compensation on firm performance using selected general insurance companies as a case study. Eight general insurance companies which were listed in Nigeria Stock Exchange (NSE) were used from 2009-2013. The time frame used considered the recapitalization in the insurance industry that occurred in 2007. They made use of secondary data which were collected from the published annual reports of the eight (8) general insurance companies under study. The data was analyzed using the regression analysis. Return on Assets (ROA) and net claims paid (NC) were used to establish a relationship between with directors’ compensation. The results of the study revealed a significant relationship between annual directors’ compensation and firm performance of the general insurance companies. It also showed a significant but negative relationship between directors compensation and Return on asset, while that of net claims paid was significantly positive. Akter etal (2020), Directors’ Remuneration and Performance: Evidence from the Textile Sector of Bangladesh, They used Generalized Method of Moments (GMM) and data pertaining to listed textile companies of Dhaka Stock Exchange (DSE) from 2011 to 2017 resulting in a total of 140 firm-year observations. They used directors’ remuneration and board independence as the independent variables and some other control variables like firm age, size, leverage, and operating efficiency. The results of the study showed that there existed a negative association between board remuneration and firm performance. They found no significant relationship between board independence and firm performance of the sample firms. John etal (2019) studied the effect of Directors’ Remuneration on Financial performance; Evidence from the Nigerian Hospitality industry. They employed ex-post facto research design using panel data from 2009 to 2018. The scope of the study comprised of the three hotels listed in the Nigerian Stock Exchange as at December 2018. Necessary data were obtained from the audited financial reports of the selected companies. The results of the regression analysis revealed a positive significant relationship between directors’ remuneration and corporate financial performance. Drake & Kevin (2003) examined the impact of Executive remuneration and firm performance: Evidence from a panel of Mutual organizations. The relationship between the remuneration of: the highest paid director (HPD), mean Board remuneration (Director), and the Chairperson of the Board (Chair) and firm-level performance were examined on a panel of mutual building societies from 1991 to 1996. Profitability and the change in total factor productivity (TFP were two measures of performance employed. The result of the study showed a strong positive relationship between profitability and pay is found for the HPD but not for the Director or Chair. The relationship between pay and TFP change is generally weak for all three measures of executive remuneration. A strong relationship between size and the executive remuneration measures is found, particularly for the Director. Singhal & Agrawal (2022) studied the Impact of director’s Remuneration on financial performance of top 10 BSE Listed companies from. 2019-2021Financial performance of the company was measured by various financial ratios i.e. NPR, DE, ROCE, CR, ROA. Secondary data were collected from the official website of the company. E views were used to investigate the correlation between Directors remuneration and financial performance. The result of the study indicates that director’s remuneration has significant impact on financial performance. Saidu, Bello & Jibril (2017), Executive Compensation and Financial Performance; Industry Sensitivity Test. They used ex post-facto research design to test its objectives using ten years data drawn from banking and construction industries with results obtained from data analysis using both descriptive and inferential statistics. The result of the study showed that both correlation and OLS results revealed significantly negative and positive results on banking and construction industries respectively. Capuano (2022) investigated the impact of directors’ remuneration on bank performance: Evidence in the US for the period 1999–2021. They focused on the remuneration of the chief executive officer (CEO), neglecting that of the board members. The scientific analysis methodology was adopted based on the analysis of panel data. The results of the data analysis made it possible to highlight the existence of a significant link between the remuneration policies adopted by banks concerning the corporate results obtained in terms of profitability. Secondly, the results showed differences, in terms of impact on banking performance, between the remuneration of chief executive officers and the remuneration of directors. Aslam, Haron& Tahir 2019. Studied How director remuneration impacts firm performance: An empirical analysis of executive director remuneration in Pakistan, They used GMM approach to account for the problem of potential endogeneity and unobserved heterogeneity that arises due to the potential reverse causality (pay and performance) for a sample of non-financial firms listed in the KSE from 2009 to2016. They supported the agency theory whereby CEOs/board of directors is compensated for their prior level of market-based performance. In addition, it weakly supports the notion of the steward/tournament theory. The result of the study revealed that CEOs/board director’s remuneration is highly persistent and takes time to adjust to long-run equilibrium.
Methodology
This research adopted correlation research design and was considered adequate and appropriate for this study because it describes the statistical relationship between the independent variable of the study (Directors remuneration) and the dependent variable (Return on Equity). The population consists of selected firms from Oil and Gas and Consumer goods Sector namely Conoil Plc, Champion Breweries Plc, Dangote Sugar Refinery Plc, Flour Mills Nigeria Plc, Forte Oil Plc, Honeywell Flour Mills Plc, MRS oil Nigeria Plc, Nestle Nigeria Plc, Oando Plc, Total Nigeria Plc quoted on the Nigerian Stock Exchange as at 31st December 2021 and covered a period of Ten (10) years (2012-2021). Purposeful sampling technique was employed to select the sample. The sample selected was in line with this, the sample size is all the ten (10) selected quoted firms on the Nigerian stock exchange namely Conoil Plc, Champion Breweries Plc, Dangote Sugar Refinery Plc, Flour Mills Nigeria Plc, Forte Oil Plc, Honeywell Flour Mills Plc, MRS oil Nigeria Plc, Nestle Nigeria Plc, Oando Plc, Total Nigeria Plc. The study employed panel data using statistical package for social sciences (SPSS 25) and Ordinary Least Square (OLS) method adopted in this study is a parametric statistical test that is based on a number of assumptions, the violation of which could affect the reliability of the results. The Pearson correlation and t-test statistics were used for inferential analysis. Two of the most commonly encountered problems addressed in this study relate to normal distribution of the variables and descriptive statistics was used to test for normality of data.
Model Specification
The model that was used to test the hypothesis formulated for this study is presented below. The null Hypothesis is tested considering the results for the P-values at 1%, 5% and 10% level of significance.
ROE = f (DIREREβ1+ LEVβ2)
ROE = α + β1DIRERE + LEVβ2+ ϵi
Where
α= the intercept
ROE = Profit after Tax divided by Total Equity.
DIRERE= the Total amount of Expenditure incurred on Directors remuneration for the year
LEV = the total liabilities divided by total assets.
ϵi= error term
Leverage is a controls variable.
Data Presentation
This part presents the results of the descriptive statistics and regression results on the impact of Directors remuneration on financial performance of selected quoted firms in Nigeria. One explanatory variable and One (1) control variable are employed for the purpose of explaining and predicting the impact of Director Remuneration on financial performance of selected quoted firms in Nigeria.
Test of Normality
The normality tests are supplementary to the graphical assessment of normality. For this study, Z skewness and Z Kurtosis are used to test for normality of the One (1) independent variable; namely Directors remuneration. The Z skewness was computed as skewness divided by standard error of skewness and the Z kurtosis was computed as kurtosis divided by standard error of kurtosis.
Table 4.2.1 shows the skewness, kurtosis and Z skewness and Z kurtosis.
Table 1 Descriptive Statistics Table for the Variables
| Variables | Skewness | Standard Error | Z Skewness | Kurtosis | Standard Error | Z Kurtosis |
| DIRERE | 2.461 | 0.241 | 10.21 | 5.559 | 0.478 | 11.63 |
This table shows the normality test for Director Remuneration
In Small samples like that of this study which the number of observations is 100, values of Z skewness and Z kurtosis greater or lesser than 1.96 are sufficient to establish normality of the data. The result of Skewness for Directors remuneration is 2.461. The Z skewness of Directors remuneration is 10.21 which is more than 1.96 shows that the data is normal which indicates that the data for Directors remuneration relates linearly to the dependent variable (Return on Equity). The results of the Kurtosis for Directors remuneration is 5.559 and the Z kurtosis of Directors remuneration is 11.63 is more than 1.96 and therefore, is normal which indicates that the data for Directors remuneration relates linearly to the dependent variable (Return on Equity). Ghasemi and Zahediasl (2012).
Table 2. Correlational Matrix of Independent and Dependent Variables
| DIRERELEVROEDIRERE 0.2840.004 ***0.4630.000 ***LEV0.2840.004*** 0.4690.000ROE0.463 .000 ***0.4690.000 *** | |||||
| Source: Author’s computation using SPSS 25The symbol * represents significant at 10%The symbol ** represents significant at 5% | |||||
| The symbol ***represents significant at 1%The results from the table above shows that Directors remuneration correlates positively with the dependent variable (Return on Equity) at 1% level of significant. Directors’ remuneration correlates positively with the control variable (Leverage) at 1% level of significant. The implication of the result is that a higher directors’ remuneration is able to motivate and retain directors in order to perform their duty and work harder for the best interest of shareholders which will result in better financial performance. |
Table 3. OLS Regression Results Directors Remuneration impact on Financial performance
| Variable | Coefficient | T – value | P – value |
| Constant | 0.147 | 2.811 | 0.006 |
| DIRERE | 0.358 | 4.159 | 0.000 |
| LEV | 0.367 | 4.265 | 0.000 |
| R | 0.582 | ||
| R2 | 0.338 | ||
| Adj R2 | 0.325 | ||
| F stat | 24.785 | ||
| F-Sig | 0.000 | ||
| DW | 1.950 |
Source: Author’s computation using SPSS 25
The estimated equation of the study is presented as follows:
ROE = 0.147 + 0.358 (DIRERE) + 0.367 (LEV).
Financial performance measured by Return on Equity would be equal to 0.147 when all other variables are held to zero. One-unit change of Directors remuneration all other variables remain constant, would increase Director Remuneration by 0.147. The regression result of the study shows that the beta coefficient in respect of Directors remuneration is (0.358) and the t-value is (4.159) and it is significant at 1%. This means that, as far as selected firms of oil and gas and consumer goods sectors are concerned, Directors remuneration has significant impact on financial performance of quoted selected firms in Nigeria. The implication of this is that, a higher directors’ remuneration is able to motivate and retain directors in order to perform their duty and work harder for the best interest of shareholders which will result in better financial performance. This provides an evidence of rejecting the hypothesis stating that Directors remuneration has no significant impact on financial performance of quoted selected firms in Nigeria.
The overall impact Directors remuneration of is able to explain the dependent variable up to (58%). This shows a positive relationship as indicated by the R value and the remaining (42%) are controlled by other factors. Similarly, the result of the F- statistic shows the overall fitness of the model. The F- statistic has a value of (24.785) and is significant at 1% which implies that the model is fit because it is significant at all levels of significant. Durbin Watson of (1.950) shows that there is no problem of autocorrelation in the data set (Gujarati, 2004).
Findings of the Study
Directors’ remuneration has significant impact on financial performance of quoted selected firms in Nigeria which is in line with the findings of Herdan & Szczepanska (2011), John etal (2019) and Razali, etal (2018).
Conclusions
This study has contributed to findings on Accounting Research in Nigeria. It investigated whether Directors remuneration impacted on financial performance of quoted selected firms in Nigeria. The study concludes that Directors remuneration has a positive significant impact on financial performance of quoted selected Oil and gas and consumer goods firms in Nigeria.
References
Ab Razak, N.H (2014), Director remuneration, corporate governance and performance: A comparaison Between Government linked companies vs. Non-government linked companies, Corporate Board: Role, Duties & Composition, Volume 10, Issue 2.
Akter, S., Ali, H.M .,Abedin, T.M Hossain, B. (2020), Directors’ Remuneration and Performance: Evidence from the Textile Sector of Bangladesh , / Journal of Asian Finance, Economics and Business Vol 7 No 6 (2020) 265-275 265,doi:10.13106/jafeb.2020.vol7.no6.265
Aslam, E., Haron, R. & Tahir, N. (2019). How director remuneration impacts firm performance: An empirical analysis of executive director remuneration in Pakistan, Borsa Istanbul Review, http://www.elsevier.com/journals/borsa-istanbul-review/2214-8450.
Capuano, P. (2022) Impact of Directors’ Remuneration on Banks’ Performance: Evidence in the US Banking System, Corporate Board: Role, Duties and Composition, Volume 18, Issue 3.
Drake, K. & Kevin, L. (2003), Executive remuneration and Firm performance: Evidence from a panel of Mutual organizations, Department of Economics, University of Leicester, Leicester, LE1 7RH, UK.
Gujarati (2004), Basic Econometrics, Fourth edition.
Ghasemi and Zahediasl (2012), Normality Test For Statistical Analysis: A Guide for Non- Statisticians, International Journal of Endocrinology and Metabolism.
Herdan & Szczepanska (2011), Directors remuneration and Companies’ performance of Listed Companies in Poland and Uk, Foundations of Management, Vol. 3, No. 2, ISSN 2080-7279.
John, O.A., Odutola, J.O., Taofiki, A.T. & Olurotimi, E.O. (2019), Directors’ remuneration and Financial performance: Evidence from the Nigerian Hospitality Industry, Fountain University Osogbo Journal of Management (FUOJM), Volume 4(2), Page 105 – 111
Lawrence (2020) The impact of Director’s remuneration on Firms’ Performance Evidence: a Study of Nigerian Banking Sector, TUJAMSS, Vol. 7, No. 1.
Otekunrin, A.O., Nwanji, T. I. Ajayi, S., Dayo, F., Falaye, A.A.J., Eluyela, D. F. (2018), Directors Compensation on firm performance of quoted selected Firms, Journal of Social Sciences and Public Policy, Volume 10, Number 2.
Razali, M.W.M., Yee, S., Hwangi, Y., Tak, A.B & Kadri, N. (2018), Directors’ Remuneration and Firm’s Performance: A Study on Malaysian Listed Firm under Consumer Product Industry, International Business Research; Vol. 11, No. 5, ISSN 1913-9004.
Singhal & Agrawal (2022), the Impact of director’s Remuneration on financial performance of top 10 BSE Listed, Journal of Pharmaceutical Negative Results, Volume 13 Special Issue 7
International Journal of Research (IJR) 