Impact of Macro-Economic Factors on CEO Compensation: Evidence from JSE-Listed Banks

The debate over CEO compensation persists despite extensive efforts by academics and technocrats to understand its determinants. Most research has focused on how firm-specific characteristics and CEO-specific traits influence CEO compensation. However, the results have been contradictory, indicating that other factors may also play a role. This study examines the impact of macroeconomic factors on the compensation of CEOs. It examines how price variables such as interest rates, inflation, and exchange rates affect the fixed salaries and total compensation of CEOs at six South African banks listed on the Johannesburg Stock Exchange. Conducted over a 15-year period, this quantitative longitudinal study utilized secondary data from annual reports and the IRESS database. Panel data regression analysis was employed to interpret the data. The findings reveal a positive relationship between interest rates and fixed salaries, as well as between exchange rates and fixed salaries. Additionally, interest rates and total compensation are positively related, and exchange rates also have a positive relationship with fixed salaries. Understanding how macroeconomic conditions influence CEO pay helps Compensation Committees contextualize performance. It allows them to differentiate between achievement driven by a CEO’s abilities and that resulting from external factors, ensuring fair compensation and minimizing excessive rewards for “luck”. This knowledge supports the adjustment of incentive plans based on relative performance and economic-adjusted metrics, reducing the cyclical influence of macroeconomic variables on firm performance and, ultimately, CEO compensation.