Alignment of executive long-term remuneration and company key performance indicators: An exploratory study

Abstract

Orientation: Executive remuneration remains a controversial topic. A major concern is the perceived misalignment of executive remuneration with company performance. Key performance indicators (KPIs) represent the strategic focus areas that drive a company’s performance. Aligning executive remuneration, especially the long-term incentives (LTIs), with KPIs is, therefore, paramount in attaining company performance objectives. Research purpose: This study assessed the alignment of chief executive officer (CEO) LTI objectives and company KPIs for mining companies listed on the Johannesburg Stock Exchange (JSE). Motivation for the study: Prior research focused mainly on the relationship between short-term executive remuneration and company performance. The present study provides insights into the composition of CEO remuneration and whether CEO LTI objectives are aligned with company strategy. Research approach/design and method: The sample comprised 34 mining companies for the period 2010–2016. A standardised methodology was applied to measure LTIs and statistical techniques (descriptive statistics and a ratings analysis) were applied to assess the alignment between CEO LTI objectives and company KPIs. Main findings: Chief executive officer remuneration showed an increasing trend, with LTIs contributing more towards total CEO remuneration towards the end of the research period. A weak to moderate alignment was found between CEO LTI objectives and company KPIs. Practical/managerial implications: Improved, transparent governance is required to address the opaque disclosure on the alignment between company KPIs and the objectives of CEO LTIs. Contribution/value-add: The study demonstrated that annual (and integrated) report disclosures generally do not clearly describe company strategy (reflected by KPIs) nor is the link between KPIs and CEO LTI objectives always evident. Stakeholders thus may well question whether CEO remuneration is aligned to attaining sustainable company performance.

Keywords

• long-term incentives
• key performance indicators
• company performance
• executive remuneration
• mining industry