It is somewhat culturally acceptable in Zambia not to discuss executive pay. A study of the real reason why this is so has not been conducted recently therefore it is difficult to pin down the reason why it is not an issue. We are not advocating for it to be one. No! However, we cognizant of that fact that there is a correlation between executive pay and firm performance.
External to the Zambian environment, researchers such as J.E. Core et al in their 1999 article aptly named “Corporate governance, chief executive officer compensation, and firm performance” argued that CEO compensation is related to the quality of a firm’s corporate governance structures (CGS). They further argued that firms with weak CGS have poorer future performance.
From the annual reports we have analyzed from inception of our project, it is clear that premier companies on LUSE are not immune to this paradox albeit unaware of its existence. In order to determine this, listed companies need to assess the strength of their CGS. Signals can be seen when management teams pursue dividends in the midst of underperformance in order mask their agency costs. Astute shareholders are able to decode this at the annual general meeting. This can present itself in the form of inconsistent dividend policies or the lack thereof. Shareholders must impress upon the CFO to show consistency in how he/she intends to grow value for them.
Shareholders may also want to probe the Long term incentive plan or LTIP which is a type of executive compensation that typically comes in the form of performance shares or matching shares of the company. This can be triggered by the management team attaining a particular return on equity. A non-ambitious management team will set this mark very low (typically south of the cost of capital).
Striking the balance of keeping the management team motivated and focused is crucial. On the one hand, management teams know their worth and they will communicate this through the strategies they develop this to grow revenues. On the other hand, shareholders must be weary of their salient intentions in order to keep the management teams in check without overly extending the invisible hand. One way of addressing the conundrum is ensuring high caliber management are in place to take on a complex economic environment. Rewards without agency costs are the ultimate goal for shareholders.