Quantum accountability: when does enough become too much in top pay decision-making?
| Date | 25 September 2023 |
| Pages | 1455-1475 |
| DOI | https://doi.org/10.1108/ER-02-2023-0066 |
| Published date | 25 September 2023 |
| Subject Matter | HR & organizational behaviour,Industrial/labour relations,Employment law |
| Author | Susan Shortland,Stephen J. Perkins |
Quantum accountability:
when does enough become too
much in top pay decision-making?
Susan Shortland
The School of Organisations, Economy and Society (SOES),
Westminster Business School, University of Westminster, London, UK, and
Stephen J. Perkins
Guildhall School of Business and Law, London Metropolitan University, London, UK
Abstract
Purpose –The purpose of this paper is to examine how and why individuals involved in executive
remuneration (top pay) decision-making consider quantum as being appropriate rather than excessive,
theorised under the rubric of accountability.
Design/methodology/approach –In-depthinterviews were conducted with non-executive directors (NEDs)
serving on remuneration committees (Remcos), institutional investors, their external advisers and internal HR
reward experts. Transcripts were analysed using NVivo and the Gioia qualitative methodology.
Findings –Defining, measuring and applying performance conditionality in the determination of top pay
quantum such that it aligns with company strategy/culture and values, as well as individual recipient
motivations, is difficult. While creative approaches to setting top pay so as to attract, retain and motivate key
personnel are welcomed, these risk Remco members’personal/organisational reputations. Members recognise
disconnection between top pay quantum and general pay levels and how the media highlights social inequality
leading to public distrust. They believe they can contribute to more socially acceptable quantum by applying
their own values in top pay decision-making.
Originality/value –Sanctions-based, trust-based and selection/peer networks/felt-based accountability
theory is used to explain decision-makers’actions when determining top pay quantum. This paper extends felt
accountability theory to encompass public/societal accountability in the context of the appropriateness of top
pay quantum decisions.
Keywords Accountability, Corporate governance, Executive pay, Qualitative methods, Reward, Top pay
Paper type Research paper
Introduction
Pay-related industrial disputes are continuously in the UK headlines. The backdrop of the
country’s‘heat or eat’dilemma and levels of industrial action reported in the press provide a
clear political/economic context for considering the levels of executive pay (hereafter top pay).
Top pay began its accelerating trajectory in the late 1980s and early 1990s as thinking around
corporate governance and expectations around business executives’role changed.
Accompanying this, a rhetorical question was posed: why pay executives like bureaucrats
(Jensen and Murphy, 1990)? “The apparent answer ...was to load executives up with equity
pay until this became the lion’s share of their remuneration”(Clarke et al., 2019, pp.8-9). Thus,
conventional wisdom emphasised hypothetical optimised contracts (Price et al., 2018)
between corporate executives and investors. The goal was to incentivise executives through
an appropriate mix of salary (or basic pay), cash bonuses and long-term incentive plans
(LTIPs). LTIPs took the form of the grant of equity in a stock market listed company such as
those making up the Financial Times Stock Exchange (FTSE) 100. The rationale was that, in
decoupling the pay of executives compared to others employed in a business, executives as de
Importance of
quantum
1455
The authors wish to thank Laura Baker for her assistance in the design of Figure 1.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0142-5455.htm
Received 5 February 2023
Revised 23 July 2023
31 August 2023
Accepted 31 August 2023
Employee Relations: The
International Journal
Vol. 45 No. 6, 2023
pp. 1455-1475
© Emerald Publishing Limited
0142-5455
DOI 10.1108/ER-02-2023-0066
facto shareholders themselves would be focused on pursuit of maximising total shareholder
return (Harvey et al., 2020) and this would result in higher earnings for themselves. [For a
detailed summary of the composition of the top pay package see Jones and Perkins, 2020,
pp. 341-389.]
Accountability “is always related to good governance”(Abd Aziz et al., 2015, p. 164).
Accountability within the UK code specifying the determination of top pay setting is
delegated to the company board’s remuneration committee (Remco), comprising exclusively
independent board members, that is non-executive directors (NEDs) and their appointed
chairs (FRC, 2018;Ogden and Watson, 2012). Remcos take external advice from specialist
reward consultants plus internal human resources’(HR) advisory input (Perkins and
Shortland, 2023). Institutional investors, as external stewards representing company
shareholders, are required to scrutinise the outcomes as well as Remco decision-making
set out in an annual report complementing each company’s annual corporate performance
accounting to shareholders (FRC, 2020). Investors have two votes on company pay –one that
is binding (a resolution to approve a company’s directors’remuneration policy) and one that is
advisory (on the annual report on remuneration policy implementation policy) (Department
for Business Innovation & Skills, 2013;Ndzi, 2019). Under UK company law, they also have a
binding vote on any new LTIP scheme –also known as Performance Share Plans (Feller and
Rink, 2023). “London Stock Exchange listing rules require that any remuneration
arrangement that involves the issuing of new shares or stretches over more than one
financial year receives shareholder approval”(Gregory-Smith and Main, 2014, p. 4). We
present the following four research propositions (RPs).
RP1. The total amount of executive remuneration (quantum) decided by top pay
decision-makers is influenced by the nature of publicly available information in
legislation and published company-specific documents.
RP2. The composition and value of the top pay package is influenced by market trends
often in benchmarked data obtained via pay consultants.
RP3. Top pay quantum is influenced by the people involved in the processes governing
Remco operations.
RP4. Top pay quantum is influenced by social responsibility both linked to media
scrutiny and decision-makers’value sets.
This paper aims to explain how the level of top pay quantum, namely the total value of the
remuneration received by executives in UK FTSE 100 companies, is determined. It explores at
what point this level of quantum crosses the line to become excessive, becoming a focus for
unfavourable institutional investor voting and the generation of negative media stories, in
turn leading to public scrutiny of top pay decision-makers’accountability (Bebchuk and
Fried, 2003). Decision-makers’professional and personal reputations are at stake when they
decide how much is enough/too much in respect of top pay. Hence, we draw upon the views of
Remco decision-makers, their advisers and institutional investors to obtain data ontheir first-
hand experiences of the determination and nature of measurement of executive performance
and associated pay outcomes, and to explore how their subjective sense of accountability
influences their decisions on quantum. It theorises the problem under the rubric of
accountability theory (Abd Aziz et al., 2015;Besley, 2006;Campbell, 1979;Frink and Klimoski,
2004;Han, 2020;Kuo et al., 2022;Mansbridge, 2014;Power, 1994;Sabel and Zeitlin, 2008;
Tamir, 2012;Vandenabeele, 2009;Xiao and Xiao, 2010).
Our research question is.
RQ. What factors influence those accountable for decision-making when determining top
pay quantum?
ER
45,6
1456
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