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.
