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What Is the Relationship between Executive Compensation and Corporate Governance?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 06 September 2016
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The relationship between executive compensation and corporate governance can be seen in the manner in which executive compensation can be utilized in different ways as part of corporate governance to various ends. Corporate governance refers to the amalgamation of all of the different applications and platforms utilized by those responsible to steer the affairs of a company. The people involved in corporate governance are those within and outside the company who have a say in the way the company should be run, including the board of directors and the shareholders. Even the employees and various managers within the company may be able to contribute toward the manner in which the affairs of the company should be administered. To this end, the link between executive compensation and corporate governance is reflected in the decisions made by such stakeholders in the company regarding executive compensation.

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One of the reasons the subject of executive compensation is important is because the right mixture of remuneration and benefits can have an impact on the overall behavior of the executive in charge by translating to a form of motivation for that person to perform better. This link between executive compensation and corporate governance is based on the fact that it is inherent in human nature for people to strive to achieve ever-increasing levels of excellence when they have a source of motivation to encourage them. In the case of a company, the executive in charge is the one responsible for making decisions, developing and implementing policies that will determine the direction the fortunes of the company will take. Where such an executive is properly motivated through the right compensation, he or she will try even harder to put in more input toward the growth of the company.

Sometimes, the motivating factor may not necessarily be based on mere finances alone, which is where the right decision regarding executive compensation by the stakeholders will play an important part in the overall corporate governance. In this case, the remuneration and benefits could include the offer of a personal stake in the business in the form of a certain percentage of shares, which will give the executive more motivation to work harder since he or she has a personal interest in the success of the business. Since the executives are also part of the mechanism of corporate governance of the company, the decisions regarding executive compensation must also be viewed from the point of accountability and the duty of other members of the governing board to curtail any unethical spending of company money by the executives.

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