An Application Of Data Envelopment Analysis To Benchmark CEO Remuneration: A South African Study

Abstract

The purpose of the study is twofold; firstly, to use data envelopment analysis (DEA) to estimate the technical efficiencies of Johannesburg Stock Exchange (JSE)-listed companies (per industry) to convert the multiple components of CEO remuneration into multiple company determinants, namely size and performance indicators, and secondly, to develop an efficiency frontier to serve as a benchmark to suggest acceptable CEO remuneration levels. An empirical study was executed on a sample of 221 JSE-listed companies. Cross-sectional data of CEO remuneration and company determinants were obtained from the McGregor BFA database for the 2010 financial year. The study found that CEOs from 80 of the 221 companies included in the sample emerged as the benchmark CEOs and formed the efficiency frontier against which inefficient CEOs were compared. The practical value is that remuneration committees can use this model, which is based on best practices, to simplify the structuring of reasonable CEO remuneration packages.