In this chapter we examine the trends, practices and debates associated with incentives for those employees at the apex of the management hierarchy, namely senior executives, but with particular attention to incentive plans for chief executive officers (CEOs). We begin by considering the place and role of hired executives in corporate governance as well as three influential theories of executive motivation, behaviour and reward: tournament theory, agency theory and managerial power theory. We then review the main components of executive reward, as well as trends in CEO reward level and composition in a number of developed countries in recent years. Following this, attention turns to the various short-term and long-term incentive plans and associated techniques, including performance targets or ‘hurdles’, currently applied to executives. Next, we examine the academic research evidence and arguments regarding the effectiveness of executive reward practices, particularly the extent of the association between company performance and executive pay outcomes. Applying a multistakeholder perspective, the final section canvasses some of the main implications for effective executive reward practice.

Corporate governance and executive motivation and reward

The defining feature of the modern publicly listed company is the separation of ownership and control (Berle & Means 1932) and the consequent need for a formal system of internal ‘corporate governance’ aimed at maintaining alignment of interest between (1) the firm's owners (i.e. the shareholders); (2) those appointed to oversee the firm's operations in the shareowners' collective interests (the directors); (3) executives hired by the board to manage the firm's day-to-day affairs.