The Remuneration Committee and Strategic Human Resource Management

• Author: John Pymm,Calvin Jackson,Vicky Wright,Brian G. M. Main
• DOI: http://doi.org/10.1111/j.1467-8683.2008.00682.x
• Published date: 01 May 2008
• Date: 01 May 2008

The Remuneration Committee and Strategic

Human Resource Management

Brian G. M. Main,* Calvin Jackson, John Pymm, and Vicky Wright

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study questions the adequacy of the agency approach in representing how remuneration

committees design executive pay arrangements.

Research Findings/Results: Using evidence collected from interviews conducted in late 2006, with 22 members of various

UK remuneration committees, we find that concerns with legitimacy push remuneration committees towards an institu-

tional isomorphism in processes and practice.

Theoretical Implications: Any interpretation throughan agency lens of the design of executive remuneration as being a key

component in the toolbox of strategic human resource management needs to be qualified by considerations of neo-

institutionalism. There is scope for a melding of the two approaches.

Practical Implications: The fulfillment of the expectations placed upon the remuneration committee necessitates an

adequate allocation of time and resource plus self-awareness on the part of the committee of the inherent tendency to follow

the norms, rules of thumb, and customary practice of others. The remuneration committee chair emerges as a pivotal actor,

and this position merits being treated as a weighty and onerous appointment, possibly on a par with thatof the chair of the

audit committee.

Keywords: Board Processes, CEOs, Compensation Committee, United Kingdom

INTRODUCTION

The problem of creating incentives for the top managers

of an enterprise where ownership is widely dispersed

has been recognized since the days of the joint stock

company (Smith, 1976: 264) and in more modern times

gained the label of the problem of “separation of ownership

from control” (Berle and Means, 1932: 25). The dominant

theoretical approach to the modern version of this problem

is agency theory (Jensen and Meckling, 1976), which points

to the use of an appropriately designed reward mechanism

as a way of aligning the interests of the directors with

those of the owners (Murphy, 1999: 38). Even in the broader

high-performance human resource management approach

(Pfeffer, 1998), the use of performance-contingent pay is rec-

ognized as a key component. For the top management team

or directors of a company, the difficulty of direct supervision

by outside directors has long been accepted as creating an

obvious locus for the application of such practices and the

study of the CEO pay-performance relationship, in particu-

lar, has been an actively researched area (Murphy, 1999).

Early estimates of the magnitude of this pay-performance

linkage turned out to be empirically modest, which

perplexed researchers, given the key importance of the

relationship,

Agency theory predicts that an optimal contract will tie the

agent’s expected utility to the principal’s wealth; therefore

agency theory predicts that CEO compensation policies will

depend on changes in shareholder wealth. (Jensen and

Murphy, 1990: 242)

With empirical estimates pointing to the CEO gaining a

mere $3.25 for every $1,000 change in shareholder wealth,

these authors concluded that CEO compensation was no

more variable than the compensation of hourly and salaried

employees. The relative importance of company size in

determining CEO pay led them to suggest that CEOs were

paid like bureaucrats. The expanded utilization of equity-

related pay in boardrooms during the 1980s and 1990s in-

creased these estimated magnitudes somewhat (Hall and

Liebman, 1998) and consideration of the risk aversion of

directors lowered what might be deemed as empirically

*Address for correspondence: Prof. Brian Main, University of Edinburgh, Business

School, 50 George Square, Edinburgh, United Kingdom EH8 9JY.Tel: 0131-650-8360;

E-mail: Brian.Main@ed.ac.uk

THE REMUNERATION COMMITTEE AND STRATEGIC HUMAN RESOURCE MANAGEMENT 225

Volume 16 Number 3 May 2008

© 2008 TheAuthors

Journal compilation © 2008 BlackwellPublishing Ltd

doi:10.1111/j.1467-8683.2008.00682.x