Why Do Companies Use Performance-Related Pay for Their Executive Directors?

This paper sets out the results of interview-based research to determine why companies use performance-related pay. The findings indicate that many companies adopt this structure despite a belief that the money does not motivate executives. Reasons related in part to best practice in human resource management: pay structures were designed to attract and retain executives with the potential of large earnings; to focus their efforts in the direction agreed by the board; and to demonstrate fairness. Importantly, the variable pay was seen as a symbol of the director's success, both internally and to his or her peers in other companies. Finally, and significantly, an institutional theory explanation was given: companies used performance-related pay because their peers did, and because that legitimised them in the eyes of the establishment.