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The main objective of this thesis is to analyse the consequences of performance incentives in employment contracts. This topic has attracted much attention in economic research, one of the reasons being its high relevance in business environments where it is understood that incentive compatible contracts are crucial to recruit and retain employees as well as to increase their performance. Our study generates a number of novel results and addresses the topic through three studies.

Performance Related Pay (PRP) explicitly links the level of pay an employee receives to that employee's performance. Intuitively, it would appear likely that employees would increase their work effort in order to maximise their earnings from PRP. However, there is now a substantial body of research evidence, which suggests that PRP is not particularly effective in increasing employee motivation in practice. Despite this research evidence, PRP continues to remain popular as a payment system amongst firms. This Thesis uses a case study of Thames Water, a large utility company, to examine the paradox between the continuing popularity of PRP and its apparent ineffectiveness as a tool for increasing employee motivation. Evidence from an employee survey and interviews with key managers, together with information from internal company documentation, is brought together to explore five related questions: 1. Why did Thames Water use PRP. 2 How effective has PRP been in Thames Water as a motivator for employees. 3. Why was PRP not more effective as a motivator for employees. 4. How effective was PRP in delivering the other objectives it was originally intended to achieve. 5. Why does Thames Water continue to use PRP. The analytical approach adopted, using three theories of motivation as a framework against which to examine the motivational effectiveness of PRP, provides a new way of looking at the possible limitations on the motivational effect of PRP. This thesis touches on the question of whether and how PRP brings about cultural change; this in turn raises complex questions of causation, which call into question the effectiveness of PRP as a mechanism for bringing about cultural change.

The purpose of this research is twofold. Firstly, it examines the relationship between the use of financial and non-financial performance measures in executives’ annual incentive systems and firm performance. Secondly, it looks at the extent to which this relationship is influenced by five different organisational contingencies (business risk, ownership structure, organisational culture, the quality of the performance measures used in executives’ annual incentives and the effectiveness of the executives’ reward system). Agency theory and contingency theory are used to develop the theoretical framework that underpins this study. The research design is based on survey and archival data from 132 private and publicly quoted organisations based in the UK. Data is studied using multivariate analysis, in particular, multiple regression analysis with main and interaction effects. Contrary to expectations, the study finds that the relationship between the use of financial and non-financial performance measures in executives’ annual incentives and economic firm performance (measured by return on assets and sales annual growth) is negative rather than positive. However, this relationship is not universalistic. Results suggest that when organisations operate in high or low business risk environments or when organisations have clan or adhocracy cultural values the use of multi-criteria performance measures in executives’ annual incentives is beneficial as it facilitates the achievement of business goals. Results also suggest that ownership structure, the quality of performance measures and the effectiveness of executives’ reward systems are organisational contingencies that do not influence the performance impact of using multi-criteria performance measures in executives’ annual incentive systems. This thesis contributes to the management literature; in particular, to the literature that looks at the use of non-financial performance measures in management control systems. It contributes to agency-based research by providing empirical evidence that refutes some of its premises regarding the use of multi-criteria performance measures in incentive systems. This thesis also contributes to contingency-based research as it supports the notion that there is no universally appropriate management control system –in this case, the executive incentive system– which applies equally to all organisations in all circumstances.

The past two decades have seen extensive research on governance structures of the firm, executive compensation and performance. However, most of these studies are in the context of profit-making organisations with relatively very little attention being given to this subject in respect of non-profit making organisations. This study examines the determinants of executive compensation and firm performance in charities. Specifically this study attempts to answer the following questions: What are the main determinants of CEO compensation in the UK Charities? What performance measures do the UK Charities use? What are the factors that influence performance in the UK charities? Using both quantitative and qualitative methodologies, the study reports a number of interesting findings. Regarding the executive compensation, the study finds that organisational size, CEOs qualification and CEO’s tenure have a positive bearing on executive pay. However, the results suggest that the sector of the organisation and CEO duality have no impact while and CEO experience had significantly negative relations with CEO pay. Turning to the performance measures, it was found that five performance measures categories are used by the UK charities, namely, financial, the customer; the internal business process, benchmarking and learning and innovation. To get deep insights into performance, the study examined the managers’ opinions on the factors influencing performance. However, CEO pay and the sector of operations have a statistically negative influence on performance. The results indicated that four factors, namely, board size, board independence, CEO pay and sector of operations, have statistically significant influences on the overall performance of the UK charities. The also results suggest that board size and board independence have positive and significant influence on performance. In terms of individual performance measures, the size of the board has a positive and significant influence in respect to financial, customer, internal business and overall performance. The results also indicate that board independence has an influence on financial performance, internal business, benchmarking and overall performance. On the contrary, benchmarking has a positive, but not significant, relationship with CEO pay. This relationship is not surprising, as it supports the social comparison and equity theory. The results also show that the gender of the CEO appears to have a positive, but not significant, impact on the CEO’s performance, with the exception of innovation and learning.

Performance pay has been identified as a key element of modem human resource strategy but published field research has been limited. This thesis investigated the objectives, methods of operation and outcomes of several performance pay schemes through the creation and testing of several hypotheses. Evidence was gathered through a longitudinal study in one organisation augmented by case studies in two further organisations. The findings showed that organisations demonstrated a mix ofoperational and cultural objectives for introducing performance pay while the desired outcomes were to promote cultural change, internal equity and increased motivation. However, the findings from the longitudinal survey showed that the desired outcomes were not met, as viewed by the employees. Motivation was not increased, nor did the scheme help to change culture while pay satisfaction remained at a low level, although the employee response to the scheme showed a limited improvement after operating for one year. Positive employee viewpoints were highly correlated to the level of communication and satisfaction with pay. In terms of the influence of employee characteristics, women and non-union members were significantly more positive than men and union members. A cluster analysis showed that negative views were more strongly held than positive views which statistically influenced the outcomes and employees with such negative views had a 'bundle' of characteristics, namely middle grade males with long service and union membership. This research has made a number of contributions. It has added to the limited number of UK field studies and its longitudinal nature provides unique fmdings. It has provided data on the launch and initial period of operation ofa perfonnance pay scheme, as perceived by the employees. It has shown further evidence of strategic use of performance pay schemes with a newly constructed model. The findings have important implications for management, especially in relation to the identification of key supporter groups and opponents to the scheme and the issues that employees regard as key to the success of the scheme.