The Current state of literature
The study is going to study the relationship between the Chief Executive Officer incentives and the performance of the company.
Hamadi in 2011 investigated on, how the CEO incentives are calculated, and the effect the incentives have on the firm’s performance. He carried out the analysis using data from 231 public companies which are listed in the stock exchange. His aim was to find out if the incentives given to the CEO have any effect on the firm performance and the shareholders wealth. The shareholders wealth is the dividends the shareholders are entitled to at the end of the financial year. The amounts of dividends paid depend on the net profit after tax of the firm. Hamadi concluded that there is a relationship between the compensation paid to the CEO and the performance of the firm. The compensation should not be too high to reduce the shareholders wealth. It should also not be too low as this may create agency conflict between the shareholders and management of the firm..
According to Carola, CEO compensation should be based on the managerial power and the prevailing market forces. However, the amount should not be very high to have a negative impact on the performance of the firm. CEO compensation is composed of five main components; the basic salary, annual bonus, stock grants, option grants and payouts which are as a result of long term incentive plans. Carola, the shareholders should monitor the performance of the CEO. This is to minimize the incidences where the CEO pursues projects that are meant to benefit them at the expense of the firm. Restructuring the CEO compensation was found important to reduce such cases..
In 2007, Bootsma carried out a research to investigate the relationship between CEO compensation and the firm performance. His study was carried out in the listed companies based in Netherlands. He tries to find out if the incentives paid to the CEO have any impact on the company performance. The results from the study indicate that the amount of incentives paid to the CEO was related to the performance of the company. The effect, however, would be more if the incentives were given in the form of equity. According to Bootsma, CEO compensation can lead to conflict between the shareholders and management in a situation where the ownership and control of the firm is separated. The CEO and management are entrusted to invest their funds in profitable projects that are going to increase their wealth..
In 2006, Josiah also carried out an investigation to investigate the relationship between the amount of compensation paid to the CEO and the firm performance. He identified ways in which conflict of interest may be reduced between managers and shareholders. Restructuring of the remuneration package for the CEO would help to reduce the conflict. He based his studies on the performance of banks in the country. He concluded that there was no significant relationship between the amount of compensation paid to the managers and the performance of banks.
Research questions
Research questions are defined as the researcher’s anticipated explanation or opinion regarding the result of the study. It is a testable proposition in carrying out the study. The research questions are formulated from the research objectives. The questions guide the researcher in carrying out the research.
The main research question is; how does the compensation paid to the CEO affect the performance of the firm?
Secondary research questions to be investigated include; to what extent does the compensation paid to the CEO affect the wealth of the shareholders? Is there any relationship between the compensation paid to the CEO and the net profit of the firm? What is the ratio of the compensation paid to the CEO and the net profit of the firm?
Research Plan
The research process is going to involve three main steps which include; planning the research, conducting research and reporting on the findings of the research. The three steps are going to be incorporated in five chapters. Planning of the research is contained in chapter one and chapter two of the research. Conducting the research covers chapter three and four and reporting of the research findings are contained in chapter five of the research.
Chapter one is going to contain the statement of the problem, objectives of the study, research questions, research hypothesis and limitations the researcher is likely to encounter in the research process. It lays the foundation for the research process through providing an explanation as to why the research should be conducted and the problem gap to be solved.
Chapter two is going to include a literature review, both theoretical and empirical literature. Literature review involves appreciating the studies that have been done in the past regarding the statement of the problem. A conceptual framework is drawn to show the relationship between the independent and the dependent variables. Theoretical literature is the theories that have been proposed by various scholars regarding the problem under study. Empirical literature is the actual studies that have been done in the past.
Chapter three includes research design and methodologies used in carrying out the research. This included the research design to be used, the target population, the sample design and procedures, data collection instruments and procedures and the validity and reliability of the data collected. Research design involves describing the behavior of the target population without influencing it. The target population is first observed. The target population is where the data is going to be obtained. Sample design and procedure involve the methods selecting a sample from the population size. Stratified random sampling may be used to identify the sample. The sample is going to be selected in a manner that ensures it represents the whole population to avoid incorrect data. Qualitative data is going to be used in the study.
Chapter four involves the analysis and presentation of the data collected in chapter three. Each independent variable is investigated separately and its relationship with the dependent variable analyzed. Data will be presented in the form of charts and graphs. Data collected will be analyzed using linear regression method. The linear regression method is preferred because it helps to investigate the relationship between the independent variable and the dependent variable separately.
Chapter five will contain the report of the findings analyzed in chapter four. The chapter also includes recommendations made from the research. The chapter provides suggestions for future studies to be carried out regarding the study. The suggestions for future studies may arise in the process of carrying out the research or the challenges the researcher may face in carrying out the research.
Data resources
The researcher is going to identify the listed companies in the United Kingdom. A sample of five companies is going to be considered to be a representative of all other public companies in the country. Working with a sample makes the research process faster and helps to minimize on time and resources required to carry out the research.
The public companies to be used to collect the sample include; Ram Active Media Public limited company, Rambler Metals and Mining Public limited company, Rare Earth Minerals Public limited company and Real Estate Investors Public limited company. The researcher is going to be interested in the profits after tax of the companies, and the amount paid to the CEO as salaries and bonuses, the dividend payout ratio, amount of share capital, amount of debt capital and the ratio of the CEO compensation to the net profit of the firm. Information about the market price per share of companies is going to be collected from the stock exchange. The data is going to be collected for the past five years. The changes in compensation and the net profit are going to be analyzed.
Data will be collected using the questionnaire method. The questionnaires are going to contain both structured and semi-structured questions. The questionnaires will be self-administered to encourage high response rate. This helps to explain the importance of the questionnaires to the respondents. Questionnaire refers to a set of structured questions prepared by the researcher, tested and given to the respondent to fill up. Qualitative type of data is going to be collected for easier analysis.
References
Bebchuk, L. a. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives 17, 71-92.
Bootsma, A. (. (2007). An Empirical Investigation of the Relationship between Executive Compensation and Firm Performance in the Netherlands. Pay-for-performance?, 2-7.
Bulan, L. S. (2007). On the timing of Dividend Initiations. Financial Management, Winter, 31-65.
Carola Frydman, D. J. (2006). CEO Compensation. CEO Compensation, 7-14.
Conyon, M. a. (2000). Executive compensation: Evidence from the UK and Germany. Long Range Planning 33, 504-526.
Fakhfakh, H. (2011). Does CEOs Performance-based Compensation Waits on Shareholders A Cross National Analysis. International Journal of Business Administration, 2-8.
Fargher, N. a. (2009). Cross-sectional differences in the profits,returns and risk of firms iniating dividends. Managerial Finance, Vol. 35, No. 6, 509.
Girma, S. S. (2007). Corporate governance reforms and executive compensation determination: evidence from the UK. Manchester School 75(1),, 65-81.
Jensen, M. (2000). Agency costs of free cash flow. Corporate Finance and Takeovers. American Economic Review, vol. 76, no. 2,, 323-329.
Makri, M. L.-M. (2006). CEO incentives, innovation, and firm performance in technology- intensive firms; a reconciliation of outcome and behavior based incentives schemes. Strategic Management Journal 27,, 1057-1080.
McColgan, P. (2011). Agency theory and corporate governance: a review of the literature from a UK perspective. working paper, University of Strathclyde, Glasgow, 2.
Ozkan, N. (2009). CEO compensation and firm performance: an empirical investigation of UK panel data. European Financial Management (12), 1-29.
Perry, T. a. (2001). Pay for performance? Government regulation and the structure of compensation contracts. Journal of Financial Economics, 453-488.
