From this perspective, the challenges of performance based pay are evident as a medium to provide incentives to executives for performing in a manner that helps in maximizing the wealth of the shareholder. It also works as a manner to pay executives in a commensurate manner while contributing towards growth of a corporate and its performance. Directors in the board further indulge in assuring their stakeholders that performance based pay will encourage executives. They also state that it will help in aligning their interest with the shareholder interest. Reaction in the market towards plans of contingent compensation adoption further suggest that stakeholders take such assurance at the value of the person (Ljungholm, 2015).
Even though the conception of pay as rewarding factor and a motivating factor have inter relationship, the key focus lies in the way in which performance based pay challenges impact the executive setting of pay. There is no question that performance of an executive is the component of his or hers skill, motivation and ability. However, there is also no doubt that there are components other than money which can encourages individuals. An essential issue is that there are quite a lot of issues involved. This exists especially with a drive towards utilization of compensation based on performance. This is because it is through a medium to motivate executives. Such a medium is complicated.
Firstly, the directors in board are not indulged in designing the packages of compensation. Secondly, the agencies in the government are not indulged in adopting the roles for encouraging the performance based pay utilization. None of these have regarded the literature on social science (Murphy, 2003). This literature discusses motivation as well as the range till which incentives of external nature can influence the behaviour of managers. The literature on social sciences suggests that taking into determination whether compensation based on performance is a negative or a positive influence on executive pay setting. However, the results are as simplified as possible.