This thesis explores the contracts written between managers, as suppliers of managerial expertise, and firms, as consumers of managerial expertise. The aim of this study is to show that cross-sectional variations in management remuneration plans are not random, but rather, can be explained by variations in particular firm and manager attributes. The attributes of interest are the specific investments undertaken by the firm, and by the manager. Within the framework adopted in this study, an investment is deemed to be specific to a particular party if its related returns are dependent upon a continued association with that party.
The firm's resources are defined as being manager specific if the returns on those resources are higher when combined with the expertise of that manager. The human capital investments of the manager are defined to be firm specific when the returns to the manager on those investments are greater when combined with the resources of the firm. That is, there will be a loss of income to the holder of the specific investment if the coalition is terminated. The central proposition of this study is that as the specificity of the investments made by the firm (manager specific investments), and by the manager (firm specific investments) increases, both the firm and the manager will seek to put in place contractual mechanisms which act to maintain the relationship.
With a longer supply/demand horizon (relative to parties with investments of a general, non-dependent nature), both parties will favour rewards structures which are based on longer run performance indicators. Parties with specific investments will also favour contractual mechanisms which impose penalties upon the party responsible for terminating the relationship, thereby motivating each party to maintain the coalition.
A questionnaire distributed to a sample of managers was used to gather information about management remuneration plans currently being used within Australia. Within the questionnaire, the respondents were required to assess whether the returns on their human capital investments were dependent upon them maintaining a relationship with their current firm. They were also required to assess whether the returns on the firm's resources were dependent upon a maintenance of the employment relationship. The respondents were also asked to indicate whether they received performance based rewards, and if so, how the performance was measured. They also indicated whether they were able to negotiate their remuneration package, and whether they were offered deferred forfeitable remuneration and/or compensation for unexpected termination.
The results of the study indicate that where the returns on the firm's resources are dependent upon the manager, the firm will be prepared to negotiate the rewards paid to the manager. Conversely, where the returns are not dependent upon the manager, the firm be relatively less prepared to negotiate and will be inclined to pay a market rate. Further, where the firm is dependent upon the manager, the negotiated remuneration plan will use long run performance indicators, with the horizon of the indicators being positively correlated with the dependency of the firm on the relationship.
The results also show that forfeitable deferred remuneration is more likely to be offered when the firm's investments are manager specific, rather than when they are general in nature. This is consistent with the expectation that the firm will attempt to lock in unique individuals, but will be relatively indifferent to the departure of individuals with expertise of a general, and therefore easily substitutable nature. Also, the use of deferred forfeitable rewards are found to be positively correlated with performance based rewards. Offering deferred rewards in the absence of performance based rewards would encourage the manager to be more risk averse, and this is unlikely to be in the interests of the other stakeholders in the firm.
The use of termination compensation payable to the manager is found to be positively correlated with the dependency of the manager on the firm. Such a finding is supported on the basis that such a safeguard will have the effect of encouraging the manager to invest in firm specific expertise, and will also enable the firm to obtain the particular managerial expertise at a cost below that which would be available in the absence of termination safeguards.
Taken together, the results indicate that the specificity of investments made by both the manager and the firm can usefully be employed to explain cross-sectional variations in Australian management remuneration plants.