Balancing bonding and monitoring costs in remuneration governance: evidence from South Africa

Purpose The study aims to examine the interplay between bonding and monitoring costs in the context of remuneration governance. Specifically, it investigates how remuneration governance disclosures (DSCORE) moderate the relationship between executive directors’ remuneration (EDR) and firm performance in Johannesburg Stock Exchange-listed firms in South Africa, a country with advanced governance codes and significant income inequality. Design/methodology/approach Using a sample of 334 firm-year observations over six years (2017–2022), this study uses regression analysis and Johnson–Neyman techniques to identify the moderating effects of DSCORE on the EDR–performance relationship. Bonding costs are proxied by the link between remuneration and performance, while monitoring costs are proxied by the level of DSCORE. Findings The results reveal a significant positive association between accounting-based performance (return on assets) and all three remuneration proxies: short-term, long-term and total incentives. Significant relationships were only observed for market-based performance metrics (total shareholders’ return) if the COVID-19 years were excluded. A negative moderating effect of DSCORE on the EDR–performance relationship supports the substitution hypothesis, suggesting that as governance disclosure increases, the sensitivity of pay to performance decreases. This effect is most pronounced for short-term incentives and firms with below-average governance disclosures. Originality/value This study uniquely contributes to the literature by integrating the substitution and complementarity perspectives on bonding and monitoring costs within the context of a developing economy. It leverages advanced textual analysis and provides evidence on governance trade-offs, offering valuable insights for policymakers and researchers seeking to understand the broader implications of remuneration governance practices.