Executive compensation has an extensive research history. Although agency theory is an important theoretical framework used in this research, the failure to find a link between performance and compensation has stimulated the development and application of other theoretical lenses originating in diverse management disciplines. This paper proposes three main paradigms underlying theories on executive compensation—control, social-psychological and fit paradigms. It then allocates 18 theories mentioned in research on executive compensation to each of these paradigms and discusses the implications. The resulting synthesis provides new insights for research and practice in the field of executive compensation.

Agency theory can be considered to be the most widely used theory to explain executive1 compensation. Agency theory, from economics, focuses on ways to make the governance system of a corporation more efficient so that shareholders’ interests and performance expectations are realized by the Chief Executive Officer (CEO). However, the link between executive compensation and firm performance, which is one of the prescriptions of agency theory, does not receive much empirical support in the literature (Gomez-Mejia, 1994; and Young and Buchholtz, 2002). For example, in a meta-analysis including 137 organizations, Tosi et al. (2000) found that firm size indicators explain much more of the variance in CEO pay than the most highly correlated firm performance measure. The failure to find a consistent link between executive compensation and a firm’s performance has motivated some authors to supplement agency theory with other theories originating in psychology and sociology (e.g., Ungson and Steers, 1984; Wiseman and Gomez-Mejia, 1998; Bainbridge, 2005; Gomez- Mejia et al., 2005; and Perkins, 2008).

Taking recent developments into account as well as the numerous publications in the field of executive compensation, it appears that there is a need for an up-to-date overview and synthesis of the multiple theories that have been used more or less frequently as a foundation for research into executive compensation or as an explanation of business practice in this field. One recent development has been the availability of executive compensation data in Continental Europe so that executive compensation research is possible outside of the Anglo-American economies. In order to achieve this end, we have conducted a literature study of relevant articles. These articles were published between 1956 and 2009.

The paper is structured as follows. First, three paradigms underlying theories on executive compensation are identified and explained. Then the most important theoretical frameworks are allocated to one of these paradigms. Finally, each of the 18 theories that were found to serve as foundations for executive compensation is discussed. The selection of these theories is based on their occurrence in research into executive compensation, and also on the extent to which they provide additional insights into the design of executive compensation that have not yet been furnished by the other theories. It should be explicitly mentioned here that it is not our objective to replace agency theory with other theories. Rather, we recommend adding other theoretical lenses, originating in other paradigms, to make our understanding of executive compensation more complete. Finally, we report the results of a desk research on the occurrence and use of different theories on executive remuneration in leading academic journals in the field of general management.

Corporate Governance Journal, Corporate Governance Reforms, Financial Disclosures, Indian Companies, Financial Sector Reforms, Globalization, Information Asymmetries, Indian Corporate Morality, Market Mechanism, International Financial Reporting Standards, IFRS, Indian Accounting Standards, Economic Development, Financial Accounting Systems, Corporate Control Mechanisms.