No abstract

 We argue that the dominance of principal-agent theory as an approach to investigating executive pay has led to an overly narrow focus which may be unhelpful when considering cross-country differences and probably also hinders within-country analysis. The paper discusses the interlinked nature of three available theoretical lenses, namely principal-agent, executive power, and stewardship/stakeholder theories. It argues that institutional theory can provide a useful overarching framework within which appropriate variants of these approaches can be deployed to better comprehend developments in executive pay. We illustrate our approach with a discussion of executive pay in the UK and in Germany.

 In agency theory, the remuneration packages of executive directors in large companies are seen as an attempt to give them a pattern of rewards that aligns their interests more closely with shareholders as a whole. The sensitivity of total executive rewards to share price performance has become the conventional yardstick for judgements concerning whether reward packages do indeed serve shareholders' interests or executives themselves.Long-term incentive plans (LTIPs) introduced in the UK from 1995 have imposed new, firm-specific performance conditions on senior managers. While LTIPs are designed to increase performance-pay sensitivity, however, they also give executives new opportunities to manipulate the terms of LTIPs in their own favour, at the expense of shareholders and stakeholders in general.This paper presents the first estimates of UK total executive rewards that include detailed LTIP valuations. It finds that, while increasing average total rewards, the presence of LTIPs is actually associated with reductions in the sensitivity of executives' total rewards to shareholder return. This raises doubts concerning both the effectiveness of the LTIP instrument and the validity of an agency perspective in this context.