Effect of Executive Compensation on Risk Taking among Listed Commercial Banks in Kenya

Abstract

Risk is a natural element of business and community life. It is a condition that raises the chance of losses/gains and the uncertain potential events which could manipulate the success of financial institutions. Firms that implement executive compensation plans based on performance generally create more ambitious and difficult strategies. Compensation crisis and risk especially in the financial industry can result from people who are rewarded with large bonuses for gaming the system, creating artificial value, obfuscating, and taking on excessive levels of risk, all without sufficient skepticism or scrutiny. There has been a debate on executive compensation among regulators, practitioners, and academicians. Some studies find no evidence that compensation affected financial firms’ performance during the global crisis. Others find various links between managerial compensation and financial firms’ risk-taking behavior. The main objective of this study was to determine the effect of executive compensation on risk taking among listed commercial banks in Kenya. Specific objectives were to Assess the effect of executive share ownership on risk taking among the listed commercial banks in Kenya, to establish the effect of executive fixed salary on risk taking among the listed commercial banks in Kenya, to determine the effect of other executive allowances on risk taking among the listed commercial banks in Kenya and finally to examine the influence of executive annual bonuses on risk taking among listed commercial banks in Kenya. The study used an Epistemology research philosophy, causal research design was adopted whereby panel data approach was used. The target population for this study was the 11 listed banks on the NSE. Secondary Data for the year 2010 to 2015 was collected from the NSE handbook. Data collected was analyzed using descriptive statistics which included means and standard deviations. Inferential statistics such as Pearson correlation and panel regression was also used. The results were presented in form of tables, figures, charts, graphs and trend lines. Based on the findings, the study concluded that Share Ownership and risk taking are positively and insignificantly related. Regression analysis indicated that Executive Fixed Salary and risk taking were negatively and significantly related. Executive Allowances and risk taking were negatively and significantly related. Regression analysis results indicated that Executive Annual Bonuses and risk taking were negatively and significantly related. Based on the findings the study recommended that banks should pursue optimum compensation policies, which will ensure minimum cost to the bank.