5 The traditional versus the modern view

The rise of a theoretical need for performance-related pay has resulted in recent decades in the emphasis shifting to motivating the executive. The assumption is that a properly designed remuneration which rewards an executive for performance implies that the right type of executives will be attracted and retained. The idea that variable pay would also lead to cost efficiency was considered implicit, given that only good performance would be rewarded. The way that ‘motivation’ has been defined in this context has undergone a transition, however. In the traditional view, it was assumed that an executive was already motivated, and thus motivation concentrated on demonstrating approval of positive results in the form of profit-sharing. Based on the pay-for-performance approach, the correct motivation of the executive is assumed to be absent. Within this view, ‘motivating’ an executive is equated more with monitoring and guiding the executive.

This expansion of the function has resulted in a different way of looking at remuneration. Remuneration is no longer a collection of financial instruments but an ‘instrument of leadership’. The monitoring or guiding function of remuneration ensures that the valuation of the remuneration primarily depends on the incentive provided by the remuneration in advance to the executive.

The social discontent regarding the variable pay of executives can be mainly traced back to this difference in how the justification of pay is perceived. Society still adheres to the traditional view and expects executives to share the same risks as other stakeholders. The assumption is that people should in some way earn, merit or deserve their monetary compensation on the job. Executive compensation is usually set against the (achieved) success of the company. In the modern view, when determining – and thus also justifying – the remuneration, its value is perceived in terms of the financial incentive it gives executives. Justified variable pay stimulates executives to perform or continue to perform to the best of their abilities in the future. Within the pay-for-performance approach there is no distinction made between reward and motivation, only between efficient and inefficient pay. The question of fairness simply doesn’t arise.

On the one hand the justification of the remuneration therefore depends on the stimulus it gives in advance (incentive), and on the other the reasonableness of the remuneration is balanced against what has been achieved, i.e. the general success of the company in the long or longer term (reward), the result being that the remuneration debate sides tend to preach to different choirs.