Why Do Companies Use Performance‐Related Pay for Their Executive Directors?

Ruth Bender

Corporate Governance: An International Review, 2004, vol. 12, issue 4, 521-533

Abstract: This paper sets out the results of interview‐based research to determine why companies use performance‐related pay. The findings indicate that many companies adopt this structure despite a belief that the money does not motivate executives. Reasons related in part to best practice in human resource management: pay structures were designed to attract and retain executives with the potential of large earnings; to focus their efforts in the direction agreed by the board; and to demonstrate fairness. Importantly, the variable pay was seen as a symbol of the director's success, both internally and to his or her peers in other companies. Finally, and significantly, an institutional theory explanation was given: companies used performance‐related pay because their peers did, and because that legitimised them in the eyes of the establishment.

Date: 2004
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