Directors' remuneration. The need for a geo‐political perspective

Pages561-582
Published date01 October 2004
DOIhttps://doi.org/10.1108/00483480410550161
Date01 October 2004
AuthorNada K. Kakabadse,Andrew Kakabadse,Alexander Kouzmin
Subject MatterHR & organizational behaviour
Directors’ remuneration
The need for a geo-political perspective
Nada K. Kakabadse
Professor in Management and Business Research, Northampton Business
School, University College Northampton Park Campus, Northampton, UK
Andrew Kakabadse
Professor of International Management Development, Cranfield School of
Management, Cranfield, Beds, UK
Alexander Kouzmin
Professor in Management, Graduate College of Management, Southern Cross
University, Tweed Heads, NSW, Australia
Keywords Remuneration, Chief executives, Incentive schemes
Abstract There are many ways to construct an incentive program. However, most compensation
plans tend to be focused on profitability and profitability-related accomplishments with little or no
incentive for corporate social responsibility. Director’s compensation continues to climb with the
United States leading and Britain following modestly behind. The question as towhere fair pay ends
and over-compensation begins – and what that means for the community – is rarely raised. In order
to understand the impact of fair and over-compensated director’s pay on other stakeholders, a
geo-political perspective is proposed that builds on knowledge of existing theories of the firm.
Introduction
The debate on toil, what it is and what it is worth pre-occupies scholars and practitioners
alike. The historian, Thomas Carlyle, argued that “all true work is ‘sacred’” (Carlyle,
1999, p. 206). In contrast, his contemporary philosopher, John Stuart Mill, held that work
“is not good in itself as there is nothing laudable in work for work’s sake” (Mill, 1998).
The benefit to be gained from work is that of compensation and it is this latter view that
has captured the limelight. The last two decades have been dominated by the corporate
mantra of “shareholder value” and rising remuneration packages for executives
(Frederick, 1986). At the same time, the remuneration of directors is one of the most
intensely researched and, perhaps, least understood areas of management. The
director’s remuneration phenomenon attracts concern and emotion from shareholders,
employers, politicians, the press and global stakeholders. Although a number of
longitudinal studies (Buck et al., 2001; Main et al., 1995; O’Reilly et al., 1988) and
empirical surveys (Abowd and Kaplan, 1999; Camp, 1989) have attempted to explain the
interaction between remuneration structure and company performance, very little ha s
been done to explain the remunerator’s magnitude, structure and sensitivity to the
long-term impact on stakeholders and wider community (Bowen, 1953). The scholarly
debate primarily focuses on the company director’s remuneration incentives with only
an occasional mention in the popular press of the growing divide between the “haves”
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/0048-3486.htm
This manuscript has greatly benefited from the review comments made by Ruth Bender,
Cranfield School of Management and the journal’s anonymous reviewers.
Directors’
remuneration
561
Received March 2003
Accepted September 2003
Personnel Review
Vol. 33 No. 5, 2004
pp. 561-582
qEmerald Group Publishing Limited
0048-3486
DOI 10.1108/00483480410550161
and the “have nots”. Particularly, the debate over executive directors’ remuneration has
focused on three aspects of the remuneration package, namely:
.the magnitude of basic remuneration and reward increases;
.the structure of remuneration, with a focus on the large gains from share options
and the compensation payments to directors on loss of office; and
.the sensitivity of the remuneration incentive to share price performance.
This paper provides an overview of the current debate and theories that attempt to
explain directors’ remuneration (Study Group on Directors’ Remuneration, 1995).
Attention is given to agency, economic and socio-comparative approaches and
underlying theories (Coase, 1960). It is concluded that although a number of theoretical
perspectives provide some explanation of the phenomena, none truly explain it
(Ackerman and Bauer, 1976). It is argued that a geopolitical perspective is required,
namely one that considers the impact on community needs in determining these factors
(Carroll, 1979; Chamberlain, 1973). A geopolitical model is presented, concluding that
broader inter-disciplinary research is needed in finding solutions to the complex issue
of directors’ remuneration integral to corporate governance and the global community
(Coase, 1937).
The agency approach
Since its conception, Berle and Means’ (1932) Principal-Agent model underpins the
philosophy of the modern theory of the firm and many models of corporate governance,
including that of executive compensation (Ratneser, 2000). Providing incentives to
managers of publicly-owned companies is the classic example of the Principal-Agent
challenge that assumes that the primary means for shareholders to ensure that
managers take optimal actions is to tie managers’ pay to the performance of their firm;
in effect to provide incentives for managers to maximise returns to shareholders
(Berle and Means, 1932). Pursuing such a linkage is considered to align the interests of
managers with the interests of shareholders.
Considering that executives take non-transparent and unobserved actions that
affect returns to shareholders, Principal-Agent theory suggests that executive
compensation needs to be correlated with the total return to shareholders, typically
through ownership of the firm’s stock or options on the firm’s stock. However, despite
the compelling logic of the Principal-Agent framework, there is little existing empirical
support for the effectiveness of the Principal-Agent model when applied to executive
compensation. Using pay-performance sensitivity measures, a number of empirical
studies are unable to support the executive reward/corporate performance linkages
underlying the Principal-Agent model (Aggarwal and Samwick, 1999; Garen, 1994;
Haubrich, 1994; Janakiraman et al., 1992; Jensen and Murphy, 1990). In general, these
studies found that the pay-performance sensitivity for executives at firms with the
least volatile stock prices is an order of magnitude greater than pay-performance
sensitivity for executives at firms with the most volatile stock prices (Aggarwal and
Samwick, 1999). Overall, a number of empirical studies (Barro and Barro, 1990;
Janakiraman et al., 1992) have found that compensation increases according to industry
performance. However, the agency perspective holds that the remuneration contract
should be used to align the interests of the director with those of the shareholder
and such thinking has underpinned many regulatory committees in this area
PR
33,5
562

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