How does directors' remuneration affect SMEs’ performance?

The study uses a panel data regression analysis of 802 listed SMEs over an eight-year period (2005-2012) to explain empirically the relationship between the remuneration levels of a sample of listed Small and Medium Enterprises (SMEs) directors and firm performance. The paper also investigates whether deviations from the optimal directors’ remuneration level reduce firm performance. Using a non-linear approach, the results show that an optimum director’s remuneration level exist which results from comparing the benefits and costs of director’s remuneration. Hence, the paper does not only show how directors’ remuneration level affects firm performance, it also extends the stream of knowledge by indicating how a deviation from the optimal point influences UK-listed SMEs performance. Compared with previous literature on directors’ remuneration, this paper focuses on AIM-listed SMEs on the London Stock Exchange and our finding of a concave relationship between directors’ remuneration level and the performance of UK-listed SMEs leads us to recommend that firms, especially SMEs should endeavour to determine the optimal level of directors’ remuneration to maximise performance.