Rewards for failure: an explanation for anomalous executive remuneration

Abstract

Purpose – The present paper aims to question the rationale of paying a high remuneration to executives who are presiding over loss-making companies. The neoclassical wage model asserts that the remuneration of executive directors is positively related to their company’s financial performance. However, evidence suggests that executives can obtain a higher level of personal compensation regardless of how the company performs. Design/methodology/approach – The relationship between executive remuneration and performance for viable but loss-making Bombay Stock Exchange (BSE)-listed companies has been studied for 2009-2011. The paper examines the determinants of the level of executive remuneration as well as discerns the strength of the remuneration–performance relationship, both at the overall and across various board hierarchical levels, using the JM sensitivity and HL elasticity models. Findings – Results for univariate and multivariate analyses highlight that both the remuneration–performance sensitivity and elasticity are weak. Further, factors such as ownership structure, risk and industry class moderate the remuneration–performance elasticity. It seems that it is only the lower rung of executive directors whose cash remuneration gets adversely affected with the performance of the company. Originality/value – The paper offers valuable insight into the complexities relating to the remuneration performance relationship by putting forth a multi-theoretical perspective. The fact that executives are drawing a whopping remuneration while their companies continue to report disappointing results suggests that a catalytic role has to be played by the government so as to ensure that executive remuneration policies and practices are consistent with the company’s long-term objectives and control environment.