It has remained a paradox whether people will be motivated if they believe that strong effort will lead to good performance and good performance will lead to desired rewards. Studies in this area have reported conflicting findings. To this end, the study examines the effect of executive compensation and share ownership on financial performance of listed Deposit Money Banks in Nigeria. Executive compensation variables were proxied with Chief Executive Officer (CEO) Pay, Chairman’s compensation and highest paid director, while percentage of shares owned by executive represent the share ownership. Financial performance was measured using net interest margin. Robust Ordinary Least Square regression technique was used for the estimation, while Stata 13 was employed as tool of data analysis. Secondary source of data was utilized and were obtained from the annual reports and accounts of the banks over the period 2007-2018. Robustness tests such as normality test of error term, multicollinearity and heteroscedasticity tests were conducted to validate the results. The findings reveal that, CEO Pay has significant positive effect on financial performance of banks, while chairmen compensation and highest paid director have negative influence on financial performance of banks. Furthermore, the increase in share ownership of the executives in the banking sector is an effective means through which the financial performance of the banks could be enhanced. It is therefore recommended that the management should tie the payment of CEO of the banks to performance. The regulators such as Central Bank of Nigeria and Securities and Exchange Commission) should encourage the banks management to be mindful when increasing the level of compensation paid to chairmen and highest paid directors without commensurate share ownership in the banks by them as they may become complacent towards encouraging increased financial performance.
Key words: Net interest margin, executive compensation, share ownership and pay-performance theory.
Copyright © 2020 Author(s) retain the copyright of this article.
This article is published under the terms of the Creative Commons Attribution License 4.0