Exorbitant executive remuneration and the link between equity incentives and company performance have enjoyed wide academic attention. However, the fixed pay spoke of the executive remuneration wheel goes mainly unnoticed in the literature (Frydman & Jenter 2010). The South African retail sector was hard hit from the onset of the financial crisis of 2008 (Englund & MacDonald 2008). Englund and MacDonald (2008) reported that retail sales in September of 2008 declined by 1.2%. This negative influence on the retail sector continued throughout the crisis. Company turnover in the retail sector was negatively influenced, having a negative effect on return on equity (ROE).

Since the early 2000s executive compensation levels have increased dramatically. Managerial power and optimal contracting have been offered as leading reasons for this increase (Frydman & Jenter 2010). Optimal contracting is defined as occurring when the three types of agency costs (contracting, monitoring and misbehaviour) are balanced against one another to minimise the total cost (Harvey 2012). It is suggested that executives have influenced remuneration committees to increase fixed pay (despite poor company performance over the financial crisis period) in order to compensate for the loss of short-term and long-term incentive payouts (Frydman & Jenter 2010). Through managerial power, CEOs are able to influence boards and compensation committees and thus influence the structure of their remuneration packages (Doscher & Friedl 2010).

The problem with short-term incentives is that they are linked to the financial performance of the company; because of the inability of companies to perform during the financial crisis, the total remuneration packages of CEOs should have decreased (Bussin, Makhubela & Quail 2009). Various theories such as the principal-agent theory and managerial power suggest that the CEO could influence their guaranteed cost to company (CTC) to a point where it becomes misaligned with the financial performance of the company in order to ‘plug the gap’ left by a decrease in the short-term incentive portion (21st Century Pay Solutions Group 2011). If this relationship between guaranteed CTC of the CEO and company financial performance is not understood, the remuneration of the CEO might become misaligned to the strategic direction of the company thus the CEOs’ pay will not reflect their performance.

A remuneration package has various levels: salary, annual bonus, long-term and short-term performance incentives (Frydman & Jenter 2010).

Figure 1 illustrates how the financial reward system can be segmented (21st Century Pay Solutions Group 2011).

Well-designed incentives or variable packages should be linked to the financial performance of the company. Equity exposure will ensure long-term wealth creation as the main objective for a CEO, because of the link created between the goal and their efforts. Whilst it is clear that well-designed incentives or variable packages should be linked to the financial performance of the company, the issue of guaranteed CTC pay solutions for CEOs is more complex and open to distortion. It thus warrants further investigation (Hoi & Robin 2004).

The remuneration concept has various constructs (Ellig 2007):

Further definitions (21st Century Pay Solutions Group 2011):

In this study the definition of fixed pay or guaranteed CTC (fixed salary and benefits) will be used (McGregor 2011).

The financial performance of a company can be measured by evaluating its financial statements over a period of time. Higgins (2009) argues that the levers of financial performance are the same for all companies. This makes accurate comparison of the financial performance of companies possible. The levers of financial performance can be combined into one ratio, the ROE ratio (Higgins 2009):ROE=Net Income/Sales×Sales/Assets×Assets/Shareholders'Equity[Eqn 1]

This formula for the evaluation of financial performance is called the DuPont model. There is a connection between this model and a company's achievement of its competitive advantage (Little, Little & Coffee 2009). Rollins (2006) states that the DuPont model is an effective measure of how well a company is being managed. Soliman (2008) observed the historical DuPont analysis of various companies and then compared current financial performance to the constructs of the model, with specific reference to asset turnover. He found a positive correlation between these constructs including future share price performance. This suggests that CEOs who are able to manage the constructs of DuPont analysis are best positioned to create future value for both the company and its shareholders. The decision to use the DuPont model for analysis of the relationship between company financial performance and CEO remuneration was based on the way in which the model includes strategic decisions and the performance of management into the assessment of the financial performance of a company.

The principal-agent theory needs to be understood in order to gain an understanding of the executive remuneration process. Laffont and Martimort (2002) argue that the owner of a company needs to delegate their responsibilities to other members of the company. The owner therefore becomes the principal and the employee becomes the agent. Duffhues and Kabir (2007) mention that listed companies are characterised by the ownership of the company residing with the shareholders who reflect a diverse and wide cross-section of the population, whilst control is in the hands of a few managers responsible for the management of the company. The principal-agent theory infers that these managers or agents do not always perform their jobs solely in the best interests of the shareholders. Frydman and Jenter (2010) discuss executive pay as a possible method of rectifying this misalignment between the principal and the agent. Compensation committees are one of the key mechanisms that could assist in aligning the principal and the agent by reviewing CEO compensation with specific attention to goal setting and the alignment to incentives (Heim 2011). O'Reilly and Main (2010) describe this process as the board crafting an optimal pay mechanism to try to align the interests of the CEO with those of the shareholders. Thus it is clear that the CEO is the agent of the shareholders who, as a group, represent the principal and that the agent's goals should be aligned with those of the company and the principal.

The principal-agent theory assumes it is the purpose of the board to monitor the CEO. However, O'Reilly and Main (2010) argue that this is a very narrow view of the duties of a board. To minimise the costs associated with this theory, CEO compensation should be linked to both the CEO's performance and the company's performance to ensure an alignment between shareholders and management interests (O'Reilly & Main 2010). Prior research has shown that as the power of the CEO increases their pay increases; however, the sensitivity of their pay to performance decreases (O'Reilly & Main 2010). The King report (King Committee 2009) discusses the remuneration committee in detail and adds that it should be the duty of the remuneration committee to assist the board in setting the various salary bands within the company, particularly for the remuneration packages of the senior executives. The King report (King Committee 2009) states that remuneration committees should keep the long-term goals of the company in mind when giving remuneration advice.

The concept of executive remuneration includes all payments made to executive members of the board, including the CEO (Bussin 2010). These payments include all guaranteed CTC, short-term and long-term incentives and other financial benefits for performance rendered (Bussin 2010). Desirable remuneration packages are created to ensure the ability of the company to attract and retain the best possible CEOs. The most common determinants for executive pay are organisation size, organisation performance, executive-specific factors (such as age, experience, tenure and career path), organisation structure, job or position-specific factors and job complexity (Bussin 2010). Ellig (2007) argues that the structure of an executive's remuneration package will follow the path along which it is easiest for the executive to earn. Should short-term incentives be difficult to obtain due to factors outside the control of the CEO, the structure of the remuneration would lean towards a guaranteed CTC or fixed pay. The inverse is also true: should short-term incentives be easier to obtain, the structure of remuneration will gravitate towards higher incentive pay (Ellig 2007). The global trend is to cut or suspend short-term, long-term and incentive bonuses (Bussin et al. 2009). The South African trend for upper and middle management mirrors this, showing the trimming of benefits and bonuses (Bussin et al. 2009). This highlights the need to better understand the guaranteed CTC of CEOs and how this is aligned to the determinants of executive remuneration structure. This is supported by the research done on Dutch listed companies, where a strong negative relationship between CEO guaranteed CTC and company performance was found (Duffhues & Kabir 2007). This result was attributed to managerial power and the inability of independent board members and compensation committees to design an effective compensation strategy (Duffhues & Kabir 2007).

To determine the relationship between the various constructs of ROE: profit margin, asset turnover, financial leverage and the guaranteed CTC of CEOs in the retail and consumer goods sector.

A literature review was conducted to find the appropriate financial performance measures. DuPont analysis was selected to measure company financial performance. This study was a desktop study of secondary time series data in the public domain. All data used was audited as per JSE Listing Requirement 3.19(b) (JSE 2013). The data were gathered from financial data that had been reported over a period of six years. The six years covered the full business cycle, with growth between 2006 and 2007, a recessionary decline in 2008 and recovery from 2009 through to 2011. The data were statistically analysed to determine the relationship between company financial performance and CEO guaranteed CTC.

The universe for this study included all companies on the JSE in the retail and consumer goods sector over the period of 2006 to 2011 (Saunders & Lewis 2012). The retail sector was chosen because of the financial challenges it faced and still faces due to the financial crisis (Elliott 2011). From the beginning of the financial crisis in 2008, the South African retail sector was hard hit. Englund and MacDonald (2008) reports that retail sales in September of 2008 declined by 1.2%, with consumer spending already making a ‘U-turn’ in mid-July of that year. This negative influence on the retail sector continued throughout the crisis.

This universe was also chosen because of the fiduciary regulations that require listed companies to submit publicly accessible, audited financial statements that include the remuneration of its CEOs, which data were necessary to construct the DuPont analysis.

The data used to determine the CEOs’ pay was the guaranteed CTC of the CEO. Incentives, short-term and long-term, and bonuses were excluded. Company financial performance was measured using DuPont analysis and its various constructs: ROE, asset turnover, leverage and CPI.

Data were collected from databases containing secondary historical company financial information (McGregor 2011). In the event of data being incomplete individual companies’ annual financial reports were used to complete the data set. These annual financial reports were available from company websites or directly in accordance with JSE regulations. The statistical analysis of the data was done in the form of a simple regression analysis to determine the relationship between the dependent variable (guaranteed CTC) and the explanatory variable (company financial performance), expressed as follows:Guaranteed CTC=β0+β1⋅company financial performanceχ[Eqn 2]

This was followed by a multiple regression analysis:Guaranteed CTC=β0+β1.company financial performanceχ+⋯+βv.company financial performancev[Eqn 3]

Repeated measures analysis of variation was used to compare the means of various groups and the explained and unexplained variances. The F-ratio was used to describe the level of significance.

Cognisance is taken of the CPI when organisations are setting their budgets for the following year. This is especially so when setting budgets for the annual salary and wage bill (Bussin 2010). The relationship between CEO CTC and CPI is of interest in the context of the present study because the authors wanted to see if indeed CEO CTC moved up at a similar rate to the CPI.

Due to the nature of the study and the time constraints of the research project, the following have been identified as research limitations:

The census group included 30 companies from the retail and consumer goods sector listed on the JSE for the research period. During the research period, 42 CEOs headed up these companies. Of the sample group a total of 63% (19) had one CEO and the remaining 37% (11) had more than one CEO during the research period.

Company financial performance was measured using DuPont analysis:ROE=Net income/Sales×Sales/Assets×Assets/Shareholder's equity[Eqn 4]

Table 2 shows the mean of the sample for each of the constructs of company financial performance during the research period.

Table 3 indicates the standard deviation for the constructs of the DuPont analysis over the research period.

CEO remuneration in this study was done by examining the guaranteed CTC for the CEO.

Table 4 shows the mean of the guaranteed CTC over the research period.

Standard deviation is calculated to show the variation or dispersion of the data from the mean calculated in Table 4, above. A low standard deviation shows that the data is close to the mean, with a large standard deviation explaining that the data is spread out further from the mean and from other data points.

Table 5 shows the standard deviation for the guaranteed CTC of the CEOs during the research period.

A clear and distinctive upward linear line is visible on the CEO guaranteed CTC graph (Figure 6) over the research period.

The guaranteed CTC increase is at an average of 11.42% per annum over the research period.

The guaranteed CTC of the CEOs in this study showed a steady but significant increase of 11.42% over the research period. When this data is examined in conjunction with company financial performance it is clear that there is a difference in trend lines over the period researched. The results showed that CEO guaranteed CTC was not sensitive to the company financial performance during this period.

The CPI as per Statistics SA (2012) can be summarised as illustrated in Table 6.

In Figure 7, the initial trend is upwards but a sharp downward curve is visible from the middle of 2008 to the middle of 2011.

The CPI is an indication of the real price that the end consumer paid for a predetermined basket of goods over time and can be used as a measure of the increase in fixed remuneration per annum. The CPI showed an upward trend towards 2008 but decreased sharply from 2008.

Table 7 shows the mean, median and standard deviation for guaranteed CTC of the CEOs over the research period.

Figure 8 shows the clear upward trends for the guaranteed CTC mean from 2006 to 2008 and 2009 to 2011.

The two periods are compared to determine the correlation between the guaranteed CTC of the CEOs before and after the financial crisis.

A positive relationship between the financial performance of the company and the guaranteed CTC of the CEO was expected. A multiple regression analysis between each of the DuPont analysis constructs was done to investigate this relationship.

Table 8 displays the correlation between company financial performance in terms of the DuPont analysis and CEO guaranteed CTC over the research period. The r² or coefficient of determination is included at the bottom.

The r² or coefficient of determination will always be between 0 and 1 and shows the percentage of variation of the dependent variable explained by the regression (Albright, Winston & Zappe 2008). From Table 8 it is clear that there is a low correlation between company financial performance and CEO guaranteed CTC over the research period.

Figure 9 indicates the regression of the leverage construct on the CEO guaranteed CTC. Both means were used.

A clear negative relationship between the two variables is indicated by the linear trend line. A low r² is indicated.

Figure 10 depicts the negative relationship when the net margin mean is regressed on the guaranteed CTC mean. A low r² is indicated.

Figure 11 indicates the regression of the AT mean on the guaranteed CTC mean. A higher r² is achieved and the same negative relationship appears as with the first two constructs.

Question 2 relates to the correlation between the ROE, the product of the DuPont analysis and the CEO guaranteed CTC over the research period. Table 9 shows the correlation and r² coefficient of determination of these constructs.

The correlation is stronger between company financial performance in terms of ROE and CEO guaranteed CTC than for research question 1 but it is still weak.

In Figure 12 the ROE mean is regressed on the guaranteed CTC mean.

A clear negative relationship is indicated between the ROE mean and guaranteed CTC mean, with a strong r² relationship achieved.

In question 3 the relationship between the South African CPI and CEO guaranteed CTC before, during and after the financial crisis was analysed, to assess the possibility that an increase in the guaranteed CTC of the CEO, if any, is related to this construct. Table 10 shows a very low correlation and r² or coefficient of determination, for the CPI and guaranteed CTC.

A regression analysis was done and the negative relationship between the constructs is illustrated in Figure 13.

In research question 4, the aim was to determine the correlation between the guaranteed CTC of CEOs before the financial crises and after the financial crisis. This was done in order to determine the effect of the financial crisis on the guaranteed CTC of the CEOs. Table 11 shows the correlation and coefficient of determination between the guaranteed CTC of the CEO mean from 2006 to 2008 and guaranteed CTC of the CEO mean from 2009 to 2011.

A very strong correlation and r² are shown, explaining almost 100% of the variances detected in the analysis.

Figure 14 below shows the regression of the two constructs of research question 4. The perfect correlation of the CTC 2006–2008 mean over the CTC 2009–2011 mean indicates that no change was made to the CTC of the CEOs during or after the global financial crisis in 2008.

The regression analysis of the mean of guaranteed CTC 2006–2008 over the mean of guaranteed CTC 2009–2011 shows a positive relationship with a high r² describing most of the variances between the constructs.

Each of the measures of company financial performance, the CPI and the guaranteed CTC of the CEO returned a high coefficient of determination scores, indicating a good linear fit in the data. In question 1 and question 2, the clear negative relationship between the regressed means of the measurements of financial performance and that of the guaranteed CTC of the CEO is evident, although it shows a relatively low coefficient of determination between the constructs of the DuPont analysis.

Question 3 returned another low determinant of coefficient and as with the first two questions, the regression relationship between the constructs is negative. The guaranteed CTC of the CEOs over the research period showed a steady and significant increase. This showed the CEOs’ guaranteed CTC as not being sensitive to company financial performance or the CPI. The CPI did not seem to have an influence on the guaranteed CTC of the CEOs, as the relationship showed a negative trend.

Table 12 summarises the correlation and coefficient of determination for leverage, net margin, AT, ROE and CPI with the guaranteed CTC of the CEOs.

The relationship between the guaranteed CTC before and after the financial crisis is strong with a very high coefficient of determination and a positive relationship.

The aim of research question 1 was to investigate the possible relationship between the individual constructs of the DuPont analysis and the guaranteed CTC of the CEOs over the research period.

Research question 2 related to the correlation between guaranteed CTC of the CEO and ROE. The coefficient of determination of the regression of the ROE mean over the mean of guaranteed CTC is very strong, indicating that 57% of the variances can be explained. The regression line indicates a negative relationship between the mean of ROE and the mean of guaranteed CTC, with a strong r² explaining a substantial amount of the relationship. The negative relationship between the two constructs is alarming, as it indicates that ROE and CEO effectiveness did not influence the guaranteed CTC of CEOs over the research period.

The purpose of research question 3 was to investigate the relationship between the CPI and the guaranteed CTC of the CEOs over the research period. A very weak r² was returned (6%) and a negative relationship was evident within the correlation of the CPI and the guaranteed CTC of the CEOs. The increase in guaranteed CTC of the CEOs over the research period outperformed the CPI.

The aim of research question 4 was to divide the guaranteed CTC of CEOs into two periods and investigate the relationship between the two periods. This was done to observe the effect of the financial crisis on the guaranteed CTC of the CEOs. The correlation and coefficient of determination returned very strong values during the regression of the 2006–2008 period and over the 2009–2011 period. There is also a positive trend visible in the regression. The financial crisis of 2008 had no effect on the guaranteed CTC of the CEOs and the trend before and after the crisis stayed the same.

Analysing the research questions independently and together led to a better understanding of the constructs that influence the guaranteed CTC with which the CEOs burden their companies. The levers that make up the DuPont analysis, leverage, net margin and AT, showed a weak correlation but a negative relationship was noted for all three constructs. This shows that whilst the financial performance of the companies was under pressure during the financial crises in 2008, the guaranteed CTC of the CEOs increased.

The ROE, which shows the ability to produce returns to the shareholders, was found to have a high correlation and a negative relationship to the guaranteed CTC of the CEOs. The companies were not able to produce high returns during the research period but their CEOs’ CTC remained unaffected. The discussion of the principal-agent theory begs the question, do the CEOs, as agents for the principal, have the interests of the principal at heart? This research showed that CEOs are able to increase their guaranteed CTC regardless of the ROE of the company.

From the literature the researcher's expectation was that the financial performance of the company would not have a strong relationship with the guaranteed CTC of the CEO but that the policy used to calculate the guaranteed CTC of the CEO would be influenced by the financial crisis of 2008 and that the increase in guaranteed CTC of the CEO would level off. From the results, it can be seen that this was not the case.

The CPI has long been used as a measure of salary increases; however, from the results, it is apparent that no relationship between the CPI and guaranteed CTC of the CEOs could be found.

Research question 4 returned a strong coefficient of determination when the guaranteed CTC of the CEOs was broken up into two periods: immediately before the financial crisis and immediately after the financial crisis. A positive relationship trend was evident in the regression and it can be argued that the financial crisis did not influence the guaranteed CTC of the CEO. From the discussion of managerial power it can be argued that the CEOs used their influence and power to ensure that the guaranteed CTC construct of their total remuneration was not negatively influenced in the same way as their short-term incentives by the financial crisis. From the results, it seems that the guaranteed CTC of the CEOs in the retail and consumer goods sector was not sensitive to the financial performance of the companies in terms of DuPont analysis during the economic downturn of 2008.

There are various other measures of company financial performance that could be explored such as earnings before interest, taxes, depreciation and amortization (EBITDA), debt to asset value and pure company valuation techniques.

Short- and long term incentives could be explored in terms of company financial performance measures using the various other measures available.

A comparison of the remuneration of CEOs in developed countries and the financial performance of these companies over the research period could be compared to that of South African companies in the same sector.