INSTITUTIONAL, CULTURAL AND CONTEXTUAL INFLUENCES ON EXECUTIVE COMPENSATION PRACTICES: EVIDENCE FROM THE FINANCIAL SERVICES INDUSTRIES OF HONG KONG AND THE UNITED KINGDOM

Abstract

Studies on executive compensation, particularly in the financial services industry, are largely decontextualised and centred around dominant yet generalised management practices (Rousseau and Fried, 2001; Cooke, 2018). These concepts are assumed to be generalisable worldwide and industry-agnostic. However, they do not consider the impact of a broad range of institutional, cultural, and contextual differences, which may vary in instrumentality across different locations. Using a critical realist epistemology, this research project utilises data from interviews with 36 executives in Hong Kong and the United Kingdom to investigate the breadth of institutional, cultural, and contextual factors that have shaped executive compensation design, practice, and regulatory reforms following the global financial crisis of 2008.

The findings of this research challenge the assumed generalisability of the aforementioned dominant approaches, specifically in the field of executive compensation. The data reveal a complex interplay of contextual factors that limit the assumed portability of these practices beyond the location from which they originate. This research also problematises the existing literature, given recent trends of decontextualization in the human resource management literature (Cooke, 2018) and the existing literature’s inherent avoidance of integrated analysis, which would otherwise identify the interrelationships of these contextual factors. Through an integrated lens, this research demonstrates that executive compensation design, practice, and efforts to reform are a context-dependent meso-level product of the interrelationships between macro- and micro-level factors. The context-dependency of executive compensation design, practice and reforms provides evidence that the assumed generalisability and implicit dominance of current decontextualised management practices are flawed. There is merit in investigating and understanding the factors specific to an Asian context (Sun et al., 2010), to which the generalised application of existing dominant practices is limited in relevance and efficacy.

The findings of this research offer original empirical, theoretical and managerial contributions that directly support calls for more contextualisation in international business research (Welch et al., 2021; Cooke, 2018), and more integrated explanations in both the institutional and human resource management literature (Edwards et al., 2020; Schotter et al, 2021). It evidences that the presence, or lack thereof, of public anger, political involvement and economic agendas has a direct and interrelated impact on the design, practice, and reforms of executive compensation in different locations or contexts. It also evidences the role of transnational actors as an additional layer in the macro-level factors which influence executive compensation, design, practice and reform. This research project demonstrates that this finding has been overlooked in the existing literature to date. The data indicate that the interrelationships between contextual factors at both the macro and micro levels vary in their impact strength across locations, and consequently, have differing effects on executive compensation outcomes at the meso-level. From a managerial perspective, ignoring the impact of these interrelated factors and relying on the assumed portability of dominant executive compensation practices will limit the impact and effectiveness of these practices in other contexts. Generalisable “best practice” may be relevant in specific contexts, but deviation from this should not be viewed as a limitation (Cooke, 2018) or a sign of dilution; local adaptation is necessary to ensure congruency and efficacy within local institutional, cultural and contextual factors.