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Does ‘Best Practice’ in Setting Executive Pay in the UK Encourage ‘Good’ Behaviour?

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  • Ruth Bender
  • Lance Moir

Abstract

We examine how UK listed companies set executive pay, reviewing the implications of following best practice in corporate governance and examining how this can conflict with what shareholders and other stakeholders might perceive as good behaviour. We do this by considering current governance regulation in the light of interviews with protagonists in the debate, setting out the dilemmas faced by remuneration-setters, and showing how the processes they follow can lead to ethical conflicts. Current ‘best’ practice governing executive pay includes the use of market benchmarks to determine salary and bonus levels, significant levels of performance-related pay, the desire for executives to hold equity in their companies, the disclosure of total shareholder return compared to an index, and a perceived need for conformity, in order to grant legitimacy to policies. Whilst each of these may in some circumstances lead to good practice, each has the potential to cause dysfunctional behaviour in executives. Overall, we conclude that although best practice might drive good executive behaviour that coincides with the company’s and key stakeholders’ objectives, there are many reasons why it should not. Copyright Springer Science+Business Media, Inc. 2006

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  • Ruth Bender & Lance Moir, 2006. "Does ‘Best Practice’ in Setting Executive Pay in the UK Encourage ‘Good’ Behaviour?," Journal of Business Ethics, Springer, vol. 67(1), pages 75-91, August.
    • Handle: RePEc:kap:jbuset:v:67:y:2006:i:1:p:75-91
    DOI: 10.1007/s10551-006-9006-8
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    1. Ivan Bozhikin & Nikolay Dentchev, 2018. "Discovering a Wilderness of Regulatory Mechanisms for Corporate Social Responsibility: Literature Review," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 2, pages 145-174, June.
    2. Brian G. M. Main & Calvin Jackson & John Pymm & Vicky Wright, 2008. "The Remuneration Committee and Strategic Human Resource Management," Corporate Governance: An International Review, Wiley Blackwell, vol. 16(3), pages 225-238, May.
    3. Joana Margarida Sequeira Neto & Etienne Mullet, 2016. "Perceived Legitimacy of Executives Bonuses in Time of Global Crisis: A Mapping of Portuguese People’s Views," Journal of Business Ethics, Springer, vol. 133(3), pages 421-429, February.
    4. Linsi, Lukas & Hopkin, Jonathan & Jaupart, Pascal, 2023. "Exporting inequality: US investors and the Americanization of executive pay in the United Kingdom," LSE Research Online Documents on Economics 113543, London School of Economics and Political Science, LSE Library.
    5. Balasubramanian, Bala N. & Barua, Samir K. & Karthik, D., 2015. "Influence of Board Diversity and Characteristics on CEO Compensation: Contingent Effects of Concentrated Ownership," IIMA Working Papers WP2015-03-37, Indian Institute of Management Ahmedabad, Research and Publication Department.
    6. Maria Joutsenvirta, 2013. "Executive Pay and Legitimacy: Changing Discursive Battles Over the Morality of Excessive Manager Compensation," Journal of Business Ethics, Springer, vol. 116(3), pages 459-477, September.
    7. Ian Gregory-Smith & Brian G. M. Main, 2016. "Testing the Participation Constraint in the Executive Labour Market," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(4), pages 399-426, September.
    8. Joaquim Vergés, 2010. "Incentive schemes for executive officers when forecasts matter," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(5), pages 339-352.

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