Theory VS Theorisation

Theories are developed by researchers that we can use to generalise the world we perceived. They are useful in a way when we apply them to the context that we do search in. The process of explain and understand how theories make sense in one particular setting is called theorisation. During this process, theories can be modified or advanced and finally contribute back to our general understanding of the world and society.  I have selected a paper in the area of my research interest and use them as examples to explain the link between theory and theorisation. The theory used in the papers is borrowed from other discipline rather than accounting. The researchers apply the theory in the corporate governance setting to enhance our understanding about this field.

PERKINS, S. J. & HENDRY, C. 2005. Ordering Top Pay: Interpreting the Signals*. Journal of Management Studies, 42, 1443-1468.

This paper explores the process of how the remuneration plans are being set by the board of directors and in particular, make an effort to investigate what are the factors that might influence their decision-making.

The theory they used is the notion of competitive market from the basic economic theories. It suggests that when there are many buyers and sellers in a market place to make transactions, the price will become a mechanism to adjust the demand and supply, and no single buyer or seller has the power to manipulate the price setting.

Applying this theory in the corporate governance context, there is an executive labour market exists where companies are finding the best-suitable executives for their firms. Therefore, the level of remuneration received by the CEO is, at least partially, affected by the average price in the market. In this sense, the high remuneration received by CEO in some place might be driven by the market mechanism instead of personal opportunistic behaviours.

As you can see, apply this theory in the corporate governance content extend our understanding about this field by introduce a different motive of high CEO pay which have not yet been considered in corporate governance research. The mainstream literature suggests the high CEO compensations are dominated by CEO’s personal interest to influence the board of directors to boost their paycheck. This paper brings out another explanation suggesting board of directors might intentionally offer CEO high pays in order for the CEO to be retained in the company and continue to perform due to the force from executive labour market. This has significant implication to the corporate governance research as it serves as a potential explanation for the current inconsistent empirical findings on CEO pay and bring in richness to the understanding of the pay-setting process.