Accounting for uncontrollable factors in executive incentive scheme designs

Abstract

Orientation: Classic agency theory posits that the impact of uncontrollable factors should be excluded from executive remuneration. Existing research, however, shows a departure from this theory.

Research purpose: This study sought to determine the approaches organisations take and the reasons thereof to account for uncontrollable factors in the design of their executive incentive schemes.

Motivation for the study: There is little research in South Africa on how organisations account for uncontrollable factors in the design of their incentive schemes.

Research approach/design and method: An exploratory qualitative research using semi-structured interviews was conducted.

Main findings: South African organisations are not strictly conforming to the classic agency theory prediction for uncontrollable factors as some allow the impact of uncontrollable factors to be included, and further, hybrid approaches may be applied.

Practical/managerial implications: The menu of approaches presented will aid designers of incentive schemes to identify a tried and tested approach to adopt or improve their incentive-related policies.

Contribution/value-add: An expanded list of uncontrollable factors identified from South Africa’s uniqueness is presented. Models for (1) accounting for uncontrollable factors in incentive schemes and (2) pay for individual performance versus firm performance dilemma are presented. These add to the body of existing literature.