Performance Based Compensation and Firm Value of Commercial Banks in Nigeria

Abstract

The study examined performance-based compensation and firm value using Secondary data obtained from Nigeria stock exchange and tries to ascertain the nature of relationship between bonuses and commission and value of firm measured by enterprise value, market capitalization and price to book ratio of commercial banks in Nigeria for the period 2012-2017. Findings indicate no significant relation between profit sharing and enterprise value, no significant relationship between profit sharing and market capitalization. Also, there is no significant relationship between bonuses and enterprise value and no significant relationship between bonuses and price to book ratio. Interestingly, we found significant relationship between bonuses and market capitalization and significant relationship between profit sharing and PBV. The moderating variables liquidity significantly negatively relate with market capitalization and insignificantly relate with PBV and enterprise value. Loan loss provisioning negatively and insignificantly relate with PBV and MCAP while also negatively and significantly relating with enterprise value. Interestingly result indicates that value of banks in Nigeria are driven by market conditions and factors external to compensation as pay does not motivate enough productivity to enhance value. This may be because of delayed promotion, job may not be enriched and meaningful, long hours of work, poor job security and poor job environment. These factors discourage commitment to long-term goal and interest of shareholders. Also, the low compensation- earnings ratio in banks may serve as a disincentive to high productivity hence the negative relation of pay and firm value. We recommend improved pay, job security, promotion and recreational facilities thus aligning with Hertzberg motivational theory

Keywords: Compensation, bonuses, profit sharing, Enterprise value, Market Capitalization, price to book value, Firm value

DOI: 10.7176/RJFA/10-10-20

Publication date:May 31^st 2019