New Design Principles for Executive Pay

Abstract

In this book I have constructed a theory which links the performance of an individual senior executive, the performance of other executives who are part of the same top-management team and corporate performance. I have analysed the key elements of extrinsic motivation and explained the importance of intrinsic motivation. I have demonstrated how fairness, or inequity aversion as it is sometimes known, impacts on the perceived value of rewards and incentives. This chapter begins by summarising the main elements of behavioural agency theory, before examining the implications of the theory for the design of executive compensation strategies. It continues by explaining why these design principles are not enough in themselves to change executive pay practices, and comments on the necessity of institutional change if current concerns about executive compensation are to be adequately addressed.