Onwards and Upwards: why companies change their executive remuneration schemes, and why this leads to increases in pay

• Author: Ruth Bender
• DOI: http://doi.org/10.1111/j.1467-8683.2007.00609.x
• Published date: 01 September 2007
• Date: 01 September 2007

Onwards and Upwards: why

companies change their executive

remuneration schemes, and why this

leads to increases in pay

Ruth Bender*

This paper reports interview-based research examining reasons for the continued increase in

executive directors’ remuneration in large UK companies. This issue has not specif‌ically been

addressed by previous studies, which have focused on the level of the increases, rather than

their underlying explanations. Reasons given for making changes included: increases due to

being below-market; changing performance-related schemes that did not pay out or paid less

than expected; changes in the company’s culture or strategy; changes to senior personnel; and

compliance with good practice in human resource management and in corporate governance.

The results are analysed through two theoretical lenses. Agency theory provides an explana-

tion of the structure of the contracts; expectancy theory suggests why schemes might be

changed to motivate the executives.

Keywords: Executive remuneration, change, agency, expectancy, performance-related pay

Introduction

Much has been written about the large

increase in executive pay over the last

decade in the United States (US) (e.g. Bebchuk

and Grinstein, 2005) and the United Kingdom

(UK) (e.g. Deloitte, 2005). This rise has come

about due to absolute increases in salary

levels, and to a change in the structure of pack-

ages, with a proportionately higher level of

variable pay being available. Explanations

given for this phenomenon include an over-

reliance on surveys, leading to a ratcheting

up of pay levels (Jensen et al., 2004; Ezzamel

and Watson, 2002) and the increasing use of

complex, equity-based compensation schemes

(Bebchuk and Grinstein, 2005; Buck, et al.,

2003). This paper adds to the body of work in

this area by examining, in a UK context, some

of the underlying reasons for this continued

increase in executive directors’ remuneration.

It explains the role of the non-executive direc-

tor (NED) in setting remuneration before

approaching the work from two theoretical

perspectives: agency theory and expectancy

theory.

The use of these theoretical perspectives ties

in with the two roles of the NED as discussed

by many authors, including Ezzamel and

Watson (1997) and McNulty et al. (2003).

NEDs, who sit on the remuneration commit-

tees, have roles both as monitors, interested in

conformance to governance regulation, and as

strategists, focusing on business performance.

Both of these roles are important, but their

demands are different.

The governance role of NEDs in relation to

executive remuneration is explored through

an agency theory lens, considering how pay is

structured to align executives’ actions with the

needs of shareholders. The performance role

is examined using an expectancy theory per-

spective, looking at how the NEDs try to set

pay structures to motivate the executives.

In explaining the reasons why executive

pay appears to be continually increasing, this

study takes the results of interview-based

research in selected FTSE 350 companies,

*Address for correspondence:

Cranf‌ield School of Manage-

ment, Cranf‌ield, Bedfordshire

MK43 0AL, UK. Tel: +44 1234

751122; Fax: +44 1234 751806;

E-mail:

r.bender@cranf‌ield.ac.uk

ONWARDS AND UPWARDS 709

Volume 15 Number 5 September 2007

© 2007 TheAuthor

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA