Compensation transparency and managerial opportunism: A study of supplemental retirement plans

Telfer School of Management, University of Ottawa, Ontario, Canada
Strategic Management Journal (Impact Factor: 3.78). 04/2009; 30(4):405 - 423. DOI: 10.1002/smj.737


Existing research on managerial compensation is based primarily on optimal contracting and managerial hegemony theories. Under the optimal contracting theory, observed compensation contracts are optimally determined, aligning the interests of managers and shareholders. Under the managerial hegemony theory, observed compensation contracts deviate from the optimum because top managers with power over boards are able to influence their own pay. I argue that the impact of managerial power over boards on managerial pay, and hence the deviation of compensation contracts from the optimum, is contingent on the transparency of managerial compensation. Within this framework, I investigate the impact of supplemental executive retirement plans (SERPs)— historically the least transparent compensation component— on opportunistic decision making. An empirical analysis based on a time series sample of CEOs of S&P/TSX60 firms provides support of the compensation transparency theory. I find that SERP benefits are primarily driven by variables proxying for CEO power over the board, whereas more transparent compensation components are primarily driven by economic factors. The results also suggest that CEOs whose SERPs are contingent on firm performance appear to reduce firm R&D expenditures as they approach retirement. Both findings provide important contributions to existing research on the impact of managerial compensation on opportunistic decisions. Copyright © 2008 John Wiley & Sons, Ltd.

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    • "Another factor that is likely to indicate differences in the inclination for strategic change in a firm is board tenure . The majority of studies have analysed the effects of tenure in the TMT ( Finkelstein & Hambrick , 1996 ; Kalyta , 2009 ; Katz , 1982 ; Boeker , 1997 ; Wiersema & Bantel , 1992 ) , but many of the arguments used would be equally applicable to boards ( Rutherford & Buchholtz , 2007 ) . On the one hand , long orga - nizational tenure is thought to be associated with rigidity and commitment to established policies and practices ( Katz , 1982 ) and may also restrict information processing through the establishment of routines and repertoires for dealing with problems and issues ( Miller & Friesen , 1984 ) . "
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    ABSTRACT: Empirical This study analyses the form of the board-TMT interaction and the firm's level of strategic change. Relatedly, we explore the premise that there needs to be a good fit between the board of directors and the top management team to effectively bring about strategic change. Research Findings/Insights: Using archival data from a sample of 119 firms in the period 1993–2000, we found that when a synergy exists between the board and the TMT, there will be a greater inclination for strategic change. The results indicate that a board's inclination to contribute to strategic change increases as the board size increases. Equally, it is possible to accept that the relationship between board tenure and their inclination towards strategic change is not linear. Finally, the simultaneous analysis of board composition and the ratio of directors on the TMT, demonstrates that the interaction of both variables has effects on the firm's strategic change. Theoretical/Academic Implications: This study provides empirical support in favor of an active role of the board shaping the firm's strategic decisions. We have developed and tested a set of arguments regarding with the role of the board on the firm's change in strategy. We have investigated as well, the leveraging effect of one of the variables that define the composition of the management team on the relationship board-change in strategy. Practitioner/Policy Implications: In order to create an effective board, a broader governance structure must be examined with a detailed study of aspects of the composition of the board and the TMT (previous research has only considered characteristics linked to the CEO). The dynamics of the relationships between both governance mechanisms are essential and leverage the board capability.
    Full-text · Article · Nov 2009 · Corporate Governance An International Review
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    • "Thus, if legislation to limit CEO pay is passed, we expect a flight of capital and talent into privately held companies where an appropriate balance of risk and reward can be achieved. Alternatively, as noted above, managers may reduce their risk taking to compensate for increased risk (Kalyta, 2009). As noted by Locke (2008), over time and in general, the market for executive labor and appropriate levels of pay will find an equilibrium. "
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    ABSTRACT: Agency theory addresses problems created from the separation of principals and agents in modern corporations. Some agency theorists have investigated the exact relationship between control mechanisms (monitoring and bonding) and suggested that they work as substitutes. We posit that, although monitoring and bonding may be concurrent substitutes in a system of governance, monitoring intensity is positively related to bonding (i.e., compensation) so that over time, they are complements rather than substitutes. In particular, we suggest that increased monitoring intensity shifts risk to managers, who then require greater compensation to offset their increased employment and career risk. Accordingly, they reinforce each other in a negative cycle such that monitoring leads to increased pay, which in turn leads to increased monitoring due to complaints of excessive pay. The result is that in today's economic environment society often criticizes executive pay without realizing that, in part, higher compensation is an outcome of prior increased monitoring intensity. These findings are particularly important as elected officials are increasingly under pressure to monitor and limit executive compensation. An understanding of this relationship also has implications for executive risk taking and entrepreneurial activities.
    Preview · Article · May 2009 · Academy of Management Executive
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