THE EFFECT OF EXECUTIVE COMPENSATION AND CORPORATE SOCIAL RESPONSIBILITY ON FIRM PERFORMANCE
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The performance of every firm is vital for its survival and existence. Critical to the success of every firm is its compensation policy as well as the extent of its corporate social responsibility. Corporate social responsibility as a concept stresses the need for effective communication participation by business enterprises. It asserts that aside profit motive private firms owe the society a duty of social responsibility. Decision makers in firms are obliged to act in ways and take decisions that take into cognizance the relationship between the society and the business enterprise. It therefore becomes imperative for business enterprises to continue to display ethical behaviour, contribute to economic development as well as enhance the life of the workforce and the community in which it operates.
World Business Council for sustainable Development (2004) defines corporate social responsibility as the commitment of business to sustainable economic development working with employees, their families, the local community and society at large to improve their quality of life. Proponents of CSR argued that organisations integrate economic, social and environmental concerns into the business strategies, their management tools and their activities, going beyond compliance and investing more on human, social and environmental capital (Belal & Momin, 2009; Perrini, 2006). However, other scholars argue that organisations have no business with CSR as CSR raises cost thereby creating competitive disadvantage vis-à-vis competitors. Also, another performance driver that has gained attention in recent years is executive compensation. The compensation paid to executives of companies has been found to affect the performance of the firm. Adeyemi (2001) defines executive compensation as the remunerative package that goes with labour services.
The objectives of good compensation philosophy are to attract, motivate and retain good people for attainment of goals of the organisation (Adeoti & Isiaka, 2006). Compensation could take the form of salary, incentives as well as benefits or financial reward. The motivation to carry out their duty and act in shareholders interest could be low if top executives are poorly remunerated. However, excessive compensation could provide perverse incentives for reckless management and excessive risk taking. Consequently, determining the nature, structure and pattern of compensation for executives is vital for firm performance. The objective of this study is to examine the effect of corporate social responsibility and executive compensation on firm performance.
1.2 Statement of Research Problem
The concept of corporate social responsibility and executive compensation over the years has been a topical issue in academic discourse. According to Jooh, Niranjan & Roh (2010) current business researches have emphasized the sustainability concept due to the fact that business must meet their corporate social responsibility duties to the society alongside creating value for their shareholders in order to make a sustainable world. The performance of every firm is vital and key to its continued existence. Several factors affect the performances of a firm amongst which are executive compensation and corporate social responsibility. Several scholars have argued on the effect of CSR on performance of firms. They argue that firms who engage in CSR are seen socially responsible by the society and this increases their legitimacy, reputation as well as patronage leading to a positive spillover effect on performance. Jooh et al. (2010) further argued that engaging beyond compliance is ethically desirable even if it takes away resources from firm’s immediate needs. However, Hull and McShane (2008) argue that there are enormous costs involved in engaging in social responsibility which may affect the performance of the organisation.
Numerous researches have been carried out on the impact of CSR on firm performance with conflicting findings (Fauzi, 2009; Cheriuyot, 2010; Obusubiri, 2006; Margolis and Walsh, 2001; Osisioma, Nzewi & Paul, 2015; Mutuku, 2005). Also, the issue of the effect of executive compensation on firm performance has been researched upon resulting in vague and inconclusive findings revealing diverse patterns a in different cultures and industries (Gore, Matsunaga, & Yeung, 2003; Nyeoga, Tarus & Basweti, 2014; Aduda, 2011; Mohammad, 2015; Sigler, 2011). Executive compensation comprises the total remuneration paid to executives. Proper remuneration of executives helps align executive goals with management goals. Compensation such as stock options and cash bonuses help motivate employees to maximize shareholders wealth. Lack of proper compensation package could cause agency conflict whereby managers end up pursuing their interest at the expense of shareholders. Compensation issues have not received the needed attention in Nigeria, compared to developed economies. However, the effect of executive compensation on firm performance is still a subject of debate and far from conclusive. Very little attention has been given to this area of discourse by corporate directors, academics, regulators and financial economist as evidenced by paucity of literature. This study therefore seeks to fill these gaps in literature.
Consequently, drawing from the inconclusiveness of this area of academic discourse as well as paucity of literature, the following research questions was be asked in this study
1. What is the impact of corporate social responsibility on firm performance?
2. What is the impact of executive compensation on firm performance?
1.3 Objectives of the study
The broad objective of this study is to examine the effect of corporate social responsibility and executive compensation on firm performance. The specific objectives are to:
1. examine the effect of corporate social responsibility on firm performance
2. ascertain the impact of executive compensation on firm performance
1.4. Statement of Research Hypotheses
The following hypothesis stated in null form was tested in this study.
1. Corporate social responsibility have no significant effect on firm performance
2. Executive compensation have no significant impact on firm performance
1.5. Scope of the study
This study examines corporate social responsibility, executive compensation and firm performance. In terms of geography, the study was limited to Nigerian firms quoted on the Nigerian Stock Exchange. The study time frame was for a period of six years (2009-2015). The period was chosen as a result of availability of data.
1.6 Significance of the study
Corporate social responsibility and executive compensation policy are very vital to organisational success. The performance of any firm to a large extent rest on the effectiveness of reward system as well as its CSR. The justification for this study stems from the fact that the study was able to examine the joint effect of corporate social responsibility and executive compensation on firm performance This study will prove very useful to policy makers as well as accounting practitioners as it will make them better informed on the effectiveness of their executive compensation policies, their CSR as well as what drives firms performance.
Another significance of this study is that it contributes to existing body of knowledge on the subject matter and also would assist prospective researchers who would want to conduct further research in this area by providing a basis for them to carry out their research.
1.7. Limitations of the study
A limitation encountered in this study was in the area of data as data were not available for all quoted banks in Nigeria. This therefore restricted the study to make use of the number of banks available for the time period under consideration therefore reducing the sample size. Also imprecise measurement of variable as there is no uniform way of measuring a particular variable.
