The Influence of Compensation Plans on Firm Performance: Evidence from Non-Financial Firms Listed on the Nairobi Securities Exchange, Kenya

Abstract

Purpose: This study examined the influence of compensation plans on the performance of non-financial firms listed on the Nairobi Securities Exchange (NSE), Kenya. It responds to limited sector-specific evidence on whether executive compensation functions as an effective governance mechanism for aligning managerial incentives with organizational performance in an emerging capital-market context.

Methodology: The study was theoretically informed by Agency Theory, Managerial Power Theory, and Stewardship Theory and adopted a positivist research philosophy and an explanatory research design. A census approach was used to target all 42 listed non-financial firms on the NSE. Primary data were collected from company secretaries using structured questionnaires, with 36 firms participating, representing an 85.7% response rate. Data were analyzed using descriptive statistics, Principal Component Analysis, reliability analysis, and ordinal logistic regression.

Findings: The findings established that compensation plans have a positive and statistically significant influence on firm performance (β = 1.469, p = 0.008). The ordinal logistic regression model was statistically significant (χ² = 8.994, p = 0.003), while compensation plans accounted for approximately 24.9% of the variation in firm performance. The findings suggest that compensation arrangements that link executive rewards to organizational and performance objectives can contribute to improved firm performance. The study extends Agency Theory by providing empirical evidence that appropriately structured compensation mechanisms can strengthen the alignment between managerial interests and organizational outcomes in an emerging-market setting.

Unique Contribution to Theory, Practice and Policy: The study recommends that boards and remuneration committees should strengthen compensation systems by linking executive rewards to clearly defined, measurable, and strategically relevant performance targets, with appropriate emphasis on longer-term organizational outcomes. Regulators should promote transparent remuneration policies, effective board oversight, and disclosure practices that enhance accountability and protect shareholder interests. The findings provide evidence relevant to corporate governance practice and remuneration policy in emerging capital markets.