The purpose of this chapter is to review the existing literature regarding compensation and
corporate governance. Corporate bodies use remuneration to attract, retain, and motivate
employees. The components of pay mix and determinants that impact on the pay level are
discussed, together with the pay-setting processes, which include corporate governance and
the recent changes to it. In addition to this, the results from previous studies on the
relationship between pay and performance are summarized. Furthermore, the purpose of this
chapter is the exploration of the conceptual and theoretical approaches relevant to the
addressed gap in research. Conceptual theories that help to focus on the research from a
certain angle are related to behavioural and economic theories of pay in this study, although
with a specific focus on agency theory, the relation between pay and performance and the
mitigation of the owner-manager conflict. This framework, built from interrelated concepts,
may not necessarily be well worked-out as a theory, but it guides this research by determining
what is measured, and what statistical relationships are looked for. At the end of the chapter,
the hypotheses are built based on the framework and the literature.