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Motivation and Politics in Executive Compensation
Abstract
For the past 30 years, economists and management theorists have empirically investigated the compensation of top executives. An issue that has received critical attention is what appears to be a weak link between top executive compensation and performance. In contrast to rational models that have characterized most previous studies, this paper develops a political perspective to explain why the linkage between rewards and performance is weak. Implications for research and management practice are presented.
... His study is based on one year collection of data. Ungson and Steers (1984) believed that firms where CEOs have large stock ownership and long tenure, they can largely shape their pay. Similarly, Finkelstein and Hambrick (1988) believed that the relative power of a CEO may affect the height of the hurdles that are set to qualify for contingent pay. ...
... In addition, the studies conducted by , Himmelberg et al. (1999), and Demsetz and Villalonga (2001), all had failed to find any relationship between firm value and the executives' equity stakes. However, Ungson and Steers (1984) found that firms where the CEO had large stock ownership, longest tenure, control of top management team or other means, a CEO can largely shape his or her pay. This was supported by Finkelstein and Hambrick (1989), who believed that executives who own significant portions of their firms are likely to control not only operating decisions but board decisions as well. ...
In a typical corporate setting, a CEO is analogous to the captain of a ship with ultimate authority vested in him by the board of directors, which in turn is elected by the owners (shareholders) of the firm (Fama, E. F., & Jensen, M. C. 1983). During the period he heads the firm, it is expected from him to take wise decisions which benefits the firm in long/short term and the stakeholders of the firm become well off. However, the length of the tenure varies to a great degree from firm to firm. This paper attempts to find out the impacts of these different tenures on the performance of the firm per se. In addition to that it tries to unearth any possible discernible pattern in the CEO tenure over the time. It also looks if the remuneration generally increases with the number of years spent in a firm or is it attached to performance and tenure is meaningless for remuneration. Do CEOs with long tenure try to tweak with the firm’s capex (expenditure policy), existing dividend policy etc. are few of the questions attempted to be addressed in here. A change in the previously mentioned characteristics of the firm, would lead to a radical transformation in the fundamental structure of the same. Hence, the article asks if CEOs turn the firm into a completely different entity from what they took over, when given long tenure. The study utilizes data from the Compustat/Execucomp database from a period ranging back to 1990 till date. However, it also analyses data before 1990, as it was found that CEOs held their positions for considerably longer tenure before the introduction of SOX in 2002. That analysis gives a first-hand experience of the changes experienced by the firms in the event of CEO change. The findings indicate, that the CEOs take some time to settle themselves in and subsequently increase their bargaining power with the board. Subsequent to which CEOs, who enjoy longer tenure tweaks with the firm’s existing policies and practices.
... His study is based on one year collection of data. Ungson and Steers (1984) believed that firms where CEOs have large stock ownership and long tenure, they can largely shape their pay. Similarly, Finkelstein and Hambrick (1988) believed that the relative power of a CEO may affect the height of the hurdles that are set to qualify for contingent pay. ...
... In addition, the studies conducted by Agrawal & Knoeber (1996), Himmelberg et al. (1999), and Demsetz and Villalonga (2001), all had failed to find any relationship between firm value and the executives' equity stakes. However, Ungson and Steers (1984) found that firms where the CEO had large stock ownership, longest tenure, control of top management team or other means, a CEO can largely shape his or her pay. This was supported by Finkelstein and Hambrick (1989), who believed that executives who own significant portions of their firms are likely to control not only operating decisions but board decisions as well. ...
This study investigated the board influence and CEO power towards determining the CEO compensation system in the American SMEs from 2005 to 2010. The quantitative research method was selected for this research study. The forty small to medium-sized companies were selected through a stratified sampling method. The research question for this research study was: what relationship is there between the board influence, CEO power, and CEO cash compensation, in the American SMEs. The results found that, there was a relationship between the board influence, CEO power, and CEO salary. However, the results also found that there was no relationship between the board influence, CEO power, and bonus. The correlations between the board influence, CEO power, CEO salary were characterized as weak, indication of the complexity of the executive compensation factors and external and internal environments surrounding the American SMEs.
... His study is based on one year's collection of data. Ungson and Steers (1984) believed that firms where CEOs have large stock ownership and long tenure, they can largely shape their pay. Similarly, Finkelstein and Hambrick (1988) believed that the relative power of a CEO may affect the height of the hurdles that are set to qualify for contingent pay. ...
... The studies conducted by Agrawal & Knoeber (1996), Himmelberg et al. (1999), and Demsetz and Villalonga (2001), all had failed to find any relationship between firm value and the executives' equity stakes. However, Ungson and Steers (1984) found that firms where the CEO had large stock ownership, longest tenure, control of top management team or other means, a CEO can largely shape his or her pay. This was supported by Finkelstein and Hambrick (1989), who believed that executives who own significant portions of their firms are likely to control not only operating decisions but board decisions as well. ...
This research study explores the relationship between the executive compensation and corporate governance among the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX/S&P) companies from 2005 to 2010. The quantitative research method was selected for this research study. The eighty largest companies from the New York Stock Exchange and the Toronto Stock Exchange were selected. The random sample method was used to select the two populations from each index. The research question for this research study was: is there a relationship between CEO cash compensation and corporate governance among the Toronto Stock Exchange and the New York Stock Exchange companies. The four statistical regression models found that there was a weak relationship between corporate governance and executive compensation among the TSX/S&P and the NYSE populations. Also, the Pearson correlation results indicated that the corporate governance has a minimal role towards the determination of the executive compensation.
... Finally, under the rubric of the symbolic approach are theories such as tournament theory, figurehead theory, stewardship theory, crowding-out theory, implicit/psychological contract theory, socially enacted proportionality theory and social comparison theory (Baker et al., 2002;Davis et al., 1997;Donaldson and Davis, 1991;Frey, 1997;Kidder and Buchholtz, 2002;Lazear and Rosen, 1981;O'Reilly et al., 1988;Ungson and Steers, 1984). According to Otten (2007), "the legitimizing arguments (of the symbolic approach) are based on social (or socio-economical), constructed beliefs about executive roles and how pay ought to reflect this" (p. ...
Purpose-The purpose of this paper is to examine the empirical relationship between gray directors (non-executive non-independent directors) and executive compensation among companies listed in India's National Stock Exchange (NSE). The paper also examines the possible interplay of relationships between controlling shareholder duality (controlling shareholder being the CEO), ownership category and executive compensation. Design/methodology/approach-A sample of 438 firms listed in the NSE of India was studied using data spanning five financial years, 2012-2013 to 2016-2017. Findings-Empirical evidence suggests that there is a positive association between the proportion of gray directors on the board and executive compensation. The sensitivity of executive compensation to gray directors is found to be higher among family controlled firms. This research has also found that CEOs who belong to controlling shareholder groups received higher pay than professional CEOs. The authors conjecture that these results suggest cronyism and may contribute to lower levels of corporate governance practices in the country. Research limitations/implications-The hybrid board structure, which India has adopted with the desire to bring the best of Anglo Saxon and Japanese board philosophies, has paradoxically led to self-serving boards. Exploration of alternative thinking to bring about changes in the regulatory framework is, therefore, necessary. Originality/value-Serious problems are identified with the philosophy behind board composition mandated by Listing Requirements for Indian firms with empirical evidence showing how the existing rules generate cronyism and unfairness to minority shareholders.
... As noted in Ungson and Steers (1984) and Lin and Shi (2020), CEOs in larger firms are more likely to lose the job due to complexity of the organization and associated high risk, therefore they ask for higher pay to compensate such risk. Hill and Phan (1991) further asserted that it becomes harder for CEOs to find another better paying or equally paying executive job if they lose the current job. ...
We apply the vector autoregression with exogenous variables (VARX) approach to integrate the optimal contracting theory, the managerial entrenchment theory, the principal-agent theory, the contextual criteria theory, and the upper echelon theory. Based on this new approach, we discover two middle ground conditions between the boundary of managerial entrenchment and optimal contracting, where CEO non-entrenchment or entrenchment cannot be explained by the managerial entrenchment theory or optimal contracting theory alone. For example, some CEOs are not entrenched when the agency problem is not mitigated, while others are entrenched when the agency problem is mitigated. The results imply that merely mitigating the agency problem cannot prevent managerial entrenchment. However, not mitigating the agency problem at all leads to managerial entrenchment. We recommend the boards look at other non-financial means and social approaches (e.g., value- and culture-based trainings, performance recognition, goodwill and friendship building events, pay transparency increase, smooth flow of information among stakeholders, value-adding managerial investments, oversight committee) to minimize the impact of managerial entrenchment on both firm performance and CEO compensation. In addition, we recommend the boards take on the approaches unique to their own firms and their CEOs to address managerial entrenchment.
... Rights reserved. authority in the corporate hierarchy; they hold more power and influence over the pay-setting process (Essen et al. 2012;Ungson and Steers 1984). Our findings are similar to the results of Adithipyangkul and Leung (2019), who also documented a positive association between duality and executive compensation. ...
This study explores the association between board composition and the financial performance of the companies listed on the BSE-500 Index. The authors also analyse whether financial performance mediates the relation between board composition and executive compensation or not. The authors utilised a sample of 319 non-financial firms from the BSE-500 Index from 2010–11 to 2019–20. This time period was purposely chosen to eliminate the consequences of the 2007–2008 global financial crisis to reduce any uncertainty that may influence the company's financial performance. OLS regression techniques with firm fixed and time effects have been incorporated to test the hypotheses. To address the issues of reverse causation and endogeneity, regression models were employed with one-year lagged values for all predicted variables. In addition to OLS, the GMM technique is also used to validate the findings of the study. The findings show that financial performance fully mediates the link between board composition variables, except gender diversity, and executive compensation. These results suggest that a successful corporate governance system relies on the board's composition and how well it supervises its executives. Thus, the board may devise a fair compensation structure which is linked to financial performance to reduce managerial opportunism. This could help in aligning the interest of managers and shareholders, therefore lowering agency costs and boosting financial performance. Although executives are held accountable for the organisation's growth, sometimes they may act in their interest instead of the shareholders. Therefore, this study contributes to the literature on executive compensation and provides insights into reducing the opportunistic behaviour of managers through compensation design. In the pre-existing literature, limited studies are available that examine the direct or indirect effect of financial performance on the association between board composition and executive compensation among Indian companies. This study adds evidence to the literature on board composition of companies, financial performance, and executive compensation. This study is helpful for executives of the company and regulatory authorities while making decisions regarding board composition and executive compensation. This study encourages future researchers to conduct longitudinal studies with a larger sample and a longer time horizon.
... Firms with a large pool of external CEO candidates do not need to retain their CEO when the CEO's performance falls short of the firm's expectations because these firms can find many alternative candidates available in the CEO labor market. Increases in the CEO labor market supply will, therefore, strengthen the likelihood that firms will make timely decisions regarding CEO replacement (Fredrickson, Hambrick, & Baumrin, 1988;Ungson & Steers, 1984). Extant studies find evidence that the size of the external CEO candidate pool is positively associated with the likelihood of external CEO succession (Zhang & Rajagopalan, 2003). ...
Previous corporate governance research has paid little attention to the role of chief executive officer (CEO) labor markets in controlling CEO behaviors because the CEO labor market has been considered inefficient. With the increasing mobility of top executives across firms, however, the potential of CEO labor markets to serve as an external disciplining force has been growing. In this study, we argue that CEOs will be more pressured to engage in desirable behaviors as the CEO labor market becomes more efficient. Using a longitudinal sample of S&P 1500 firms in high-technology industries in United States from 2011 to 2019, we found that CEOs tend to increase R&D investment as CEO labor market supply increases. We also found that the tendency is greater when external CEO succession is more frequent in the market. Our results demonstrate that CEO labor markets have the potential to function as an effective external governance mechanism.
... 4 Refer to Variable Description (Section 3.2) and Appendix for definition. 5 Following Vo and Canil (2019), we considered 2008-2011 as the time of financial crisis in this study 6 Tournament theory (Lazear and Rosen, 1981), Political theories (e.g., Ungson & Steers, 1984), the Institutional theory, the Managerial-power theory (Bebchuk & Fried, 2004), Human Capital theory (Combs & Skills, 2003), Fairness theory (e.g., Wade For a detailed definition of the sub-categories of compensation, see Renneboog and Zhao (2011), Section 4.3 10 Where unavailable, the data are complemented by Bloomberg Database 11 For lobbying information see www.opensecrets.org/lobbying. 12 Directors' historic employment can help them form networks. ...
In this paper we predict and find that the lobbying activities of firms can complement executive networks in determining executive compensation. Firms of all sizes, after considering market competition as a governance mechanism, prefer to consider lobbying as a means of networking along with executive level networking to determine executive compensation. The empirical implication of the study provides guidance to scholars who should consider lobbying along with executive networks in determining executive compensation. The composite theoretical underpinning and the importance of information flow through lobbying activities of firms will be an important insight for policy makers involved in determining executive compensation.
... Hill and Phan (1991) discover that the necessity of bonus pay is diminishing toward base pay in the course of the CEO's tenure. In addition, Ungson and Steers (1984) conclude that the CEO of a larger firm has to deal with more complex tasks and faces greater risk of losing the job for mistakes. As argued by Hill and Phan (1991), such termination could cause much damage to the earning potential because a similar job might not be easily obtained in the future. ...
Coopetition denotes the simultaneous cooperation and competition in a business relationship and is broader in depth and width than competition. This pioneering comparative study employs a seemingly unrelated regression system to investigate the impact of peer‐pay bias and pay‐for‐relative performance upon the highly controversial chief executive officer (CEO) pay. The analysis of the 21 Dow–Jones firms from 1992 to 2013 shows that the pay‐for‐performance relationship is contingent on the fit between CEO's strategic decisions and firm's core competency. The CEO pay is driven by the intensification of firm coopetition. We contribute to executive compensation, corporate strategy, and econometric methods.
... Annual financial reporting influences executives via their compensation systems which are designed to curb agency costs by aligning the goals of the executives with those of the shareholder (Eisenhardt 1989). There is ample research documenting the weak link between executive pay and performance (Ungson and Steers 1984;Pearce, Stevenson, and Perry 1985). ...
The business case for sustainability can be built upon: (i) cost reduction from efficient resource utilisation, (ii) revenue enhancement, (iii) risk management, and (iv) intangible assets. However, executives often adopt a short‐term perspective owing to executive compensation, investor pressure, and decision‐making criteria tied to fixed financial reporting systems. We propose an integrated conceptual framework, which highlights how firms could embed environment and sustainability into their long‐term financial decision‐making framework. To give this goal structure, the firm could adopt: (i) longer‐term executive compensation plans, (ii) longer‐term financial reporting, and (iii) flexible financial decision‐making models which embed intangibles.
... Finally, under the rubric of the symbolic approach are theories such as tournament theory, figurehead theory, stewardship theory, crowding-out theory, implicit/psychological contract theory, socially enacted proportionality theory and social comparison theory (Baker et al., 2002;Davis et al., 1997;Donaldson and Davis, 1991;Frey, 1997;Kidder and Buchholtz, 2002;Lazear and Rosen, 1981;O'Reilly et al., 1988;Ungson and Steers, 1984). According to Otten (2007), "the legitimizing arguments (of the symbolic approach) are based on social (or socio-economical), constructed beliefs about executive roles and how pay ought to reflect this" (p. ...
Purpose
The purpose of this paper is to examine the empirical relationship between gray directors (non-executive non-independent directors) and executive compensation among companies listed in India’s National Stock Exchange (NSE). The paper also examines the possible interplay of relationships between controlling shareholder duality (controlling shareholder being the CEO), ownership category and executive compensation.
Design/methodology/approach
A sample of 438 firms listed in the NSE of India was studied using data spanning five financial years, 2012–2013 to 2016–2017.
Findings
Empirical evidence suggests that there is a positive association between the proportion of gray directors on the board and executive compensation. The sensitivity of executive compensation to gray directors is found to be higher among family controlled firms. This research has also found that CEOs who belong to controlling shareholder groups received higher pay than professional CEOs. The authors conjecture that these results suggest cronyism and may contribute to lower levels of corporate governance practices in the country.
Research limitations/implications
The hybrid board structure, which India has adopted with the desire to bring the best of Anglo Saxon and Japanese board philosophies, has paradoxically led to self-serving boards. Exploration of alternative thinking to bring about changes in the regulatory framework is, therefore, necessary.
Originality/value
Serious problems are identified with the philosophy behind board composition mandated by Listing Requirements for Indian firms with empirical evidence showing how the existing rules generate cronyism and unfairness to minority shareholders.
... The tournament theory considers pay as a prize in a contest (Lazear and Rosen, 1981). The figurehead theory sees the organisation as a place where political conflicts do exist among various political groups, and that those groups of people who succeed in manoeuvring others politically get rewarded through executive compensation (Ungson and Steers, 1984). The stewardship theory suggests that executive pay scales are premised on the philosophy that the CEO and other members of the board have agreed to align their interests to those of the shareholders and this cooperative behaviour is rewarded accordingly (Donaldson et al, 1991). ...
The purpose of this paper is to review the literature on various theories that are used in organisations today to determine executive compensation. This paper analyses the relevance of the theories that are used to determine CEO compensation in modern corporations. The paper makes an attempt to review extensively the literature on CEO compensation. This paper looks at the concerns of sixteen theories of executive compensation. This paper further analyses the special features that are associated with CEO pay. These features help us to understand the problems that experts on executive pay experience when they try to define the exact CEO pay when compared to other rewards that are non financial. The drivers of executive pay are quantified and qualified in order to provide the conceptual background needed to understand the core factors that determine executive pay. Therefore the role of institutional investors in driving managerial salary is explored in detail. Finally, the effects of firm size and good corporate governance on executive pay are carefully analysed.
... Through such a power base, CEO with higher CPLP has a considerable impact on the level of compensation for rank-and-file workers. No matter for the purpose of satisfying CEO" self-interest or the reason of underestimating employees" contribution while overestimating their own contribution, CEO with more power, can lead to more influence over the pay setting process (Ungson & Steers, 1984) [14] . We therefore hypothesize, CEO with higher CPLP will enlarge CWPR. ...
... This was supported by Jensen and Murphy (1990) found in their study that changes in both the CEO's pay-related wealth and the value of his stock holdings were positively and statistically related to the changes in the shareholder's wealth, and the CEO turnover probabilities were negatively and significantly related to changes in shareholder wealth. Ungson and Steers (1984) believed that in the firms where the CEO had large shareholdings, long tenure, control of the top management team, or other means, the CEO can largely shape his or her pay. Similarly, Finkelstein and Hambrick (1988), believed that the relative power of the CEO may affect the height of the hurdles that are set to qualify for the contingent pay. ...
This important study in Executive Compensation topic investigated the importance of Firm Ownership on the CEO Compensation in the New York Stock Exchange (NYSE) companies. This research had compared the CEO Compensation System of the Owner-Managed and the Management-Controlled companies from the period 2005 to 2010. The research question for this study was: is there a relationship between the CEO Cash Compensation, the Firm Size, the Accounting Firm Performance, and the Corporate Governance, among the Owner-Managed and the Management-Controlled companies? It was found that, there was a relationship between the CEO Salary, the CEO Bonus, the Total Compensation, the Firm Size, the Accounting Firm Performance, and the Corporate Governance, among the Owner-Managed and the Management-Controlled companies.
... As agents have a short-term orientation (Davis, Schoorman, & Donaldson, 1997), they may be less likely to take a long-term outlook required for a research and development orientation. Ungson and Steers (1984) noted empirical research that showed reduced research and development was due to a focus on short-term performance. As a result, agents, who focus on short-term performance due to stock options and other factors, may avoid substantial research and development investments. ...
The purpose of this study is examine how agency theory and stewardship theory lead to different firm-level outcomes on an array of different outcomes. Based on these differences, we argue for the development of an agent–steward measurement scale, which will help researchers classify chief executive officers (CEOs) along an agent–steward continuum. This, in turn, will spur research to predict and test CEO behaviors and firm-level outcomes. Agency theory suggests CEOs take advantage of their powerful positions to maximize their personal economic utility, whereas stewardship theory suggests CEOs are motivated through intrinsic awards and will balance their interests with those of other stakeholders. We use these theories to examine possible differences in CEO behaviors. This is important because different CEO behaviors might lead to differing impacts on important firm-level outcomes. This paper reviews the relevant agency and stewardship literatures, then offers propositions regarding CEO behaviors from agent and steward perspectives.
... Third, the dual role of CEO and chairman can be considered as the highest rank in the corporate hierarchy. This figurehead status, with more mandate and power, can lead to more influence over the pay setting process (Ungson and Steers, 1984). The length of a CEO's tenure is also likely to be an important determinant of managerial power. ...
Managerial power is the most critical element for the organizations because it plays a vital role in firm performance and pay setting process. Moreover, top management have all important information of the firms and if managerial power is high they may misuse such information. Considering the importance of managerial power numerous studies analyzed the different aspects of managerial power using data of different countries. This study proposed three hypotheses to assess the association among managerial power, executive remuneration, and firm performance. This study used PLS-SEM approach to test developed hypotheses using data of S&P/ASX 50 index firms. All of the proposed hypotheses are accepted. This study also meet the quality criteria of both reflective and formative measurement scale as prerequisite to the assessment of structural model.
... Third, the dual role of CEO and chairman can be considered as the highest rank in the corporate hierarchy. This figurehead status, with more mandate and power, can lead to more influence over the pay setting process (Ungson & Steers, 1984). We therefore hypothesize, Hypothesis 1a: CEO duality is positively associated with the value of total CEO compensation. ...
Although studies about the determinants of CEO compensation are ubiquitous, the balance of evidence for one of the more controversial theoretical approaches, managerial power theory, remains inconclusive. The authors provide a meta-analysis of 219 U.S.-based studies, focusing on the relationships between indicators of managerial power and levels of CEO compensation and CEO pay-performance sensitivities. The results indicate that managerial power theory is well equipped for predicting core compensation variables such as total cash and total compensation but less so for predicting the sensitivity of pay to performance. In most situations where CEOs are expected to have power over the pay setting process, they receive significantly higher levels of total cash and total compensation. In contrast, where boards are expected to have more power, CEOs receive lower total cash and total compensation. In addition, powerful directors also appear to be able to establish tighter links between CEO compensation and firm performance and can accomplish this even in the face of powerful CEOs. The authors discuss the implications for theory and research regarding the determinants of executive compensation.
... His study is based on one year collection of data. Ungson and Steers (1984) believed that firms where CEOs have large stock ownership and long tenure, they can largely shape their pay. Similarly, Finkelstein and Hambrick (1988) believed that the relative power of a CEO may affect the height of the hurdles that are set to qualify for contingent pay. ...
This study investigated CEO compensation system of NYSE Financial Services companies. It tested the relationship between CEO compensation, firm size, accounting firm performance, and corporate governance, from 2005 to 2010. The totaled of twenty five companies were selected through random sample method from NYSE index companies. The research question for this study was: is there a relationship between CEO compensation, firm size, accounting firm performance, and corporate governance?. To answer this question, nine statistical models were created and tested. It was found that, overall, there was a relationship between CEO salary, CEO bonus, CEO total compensation, firm size, accounting firm performance, and corporate governance. The correlations between CEO salary, CEO total compensation, and firm size were ranged from weak to good positive ratios. The correlation between CEO bonus and firm size was found to be weak positive. The correlations between CEO salary, CEO bonus, CEO total compensation, firm performance, and CEO power, were found to be ranged from weak to strong mixed ratios.
... Their argument in favor of viewing compensation as a source of power is that compensation committees set pay scales both across and within hierarchical levels and intentionally create pay differentials that indicate a manager's position and power within the firm. According to the "figurehead" view of CEOs, a CEO's compensation also sends signals about the CEO's power across organizations (Steers & Ungson, 1987;Ungson & Steers, 1984). Henderson and Frederickson (1996) provided support for this view. ...
... The managerial power hypothesis invests more power in tenured CEOs "to develop personal networks and power."(Culpan et al. [49] p. 211) so that CEO compensation may be a function of political rather than economic variables (Ungson and Steers [50]). Human capital theory (Becker [51]) postulates that employee characteristics such as educational attainment increase earnings over a lifetime. ...
... In addition to the agency approach, theoretical frameworks include tournament theory (Lazear & Rosen, 1981), human capital theory (Combs & Skills, 2003), the managerialpower hypothesis (Bebchuk, Fried & Walker, 2002), institutional theory (Balkin, 2008), political theories (e.g., Ungson & Steers, 1984) and theories about fairness (e.g., Wade, O'Reilly & Pollock, 2006). Literature reviews and summaries are provide by Gomez, Meija & Wiseman (1997), Devers, Cannella, Reilly and Yoder (2007) and Gomez-Mejia, Berrone and Franco-Santos (2010: 117-140). ...
This article describes new micro-foundations for theorizing about executive compensation, drawing on the behavioral economics literature and based on a more realistic set of behavioral assumptions than those that have typically been made by agency theorists. We call these micro-foundations “behavioral agency theory.” In contrast to the standard agency framework, which focuses on monitoring costs and incentive alignment, behavioral agency theory places agent performance at the center of the agency model, arguing that the interests of shareholders and their agents are most likely to be aligned if executives are motivated to perform to the best of their abilities. We develop a line of argument first advanced by Wiseman and Gomez-Mejia and put the case for a more general reassessment of the behavioral assumptions underpinning agency theory. A model of economic man predicated on bounded rationality is proposed, adopting Wiseman and Gomez-Mejia’s assumptions about risk preferences, but incorporating new assumptions about time discounting, inequity aversion, and the trade-off between intrinsic and extrinsic motivation. We argue that behavioral agency theory provides a better framework for theorizing about executive compensation, an enhanced theory of agent behavior, and an improved platform for making recommendations about the design of executive compensation plans.
... His study is based on one year collection of data. Ungson and Steers (1984) believed that firms where CEOs have large stock ownership and long tenure, they can largely shape their pay. Similarly, Finkelstein and Hambrick (1988) believed that the relative power of a CEO may affect the height of the hurdles that are set to qualify for contingent pay. ...
This research study in executive compensation investigated the effect of firm ownership on CEO compensation in Toronto Stock Exchange (TSX/S&P) companies. It had compared the CEO compensation system of owner-managed and management-controlled companies from 2005 to 2010. The research question for this study was: is there a relationship between CEO compensation, firm size, accounting firm performance, and corporate governance, among owner and management-controlled companies? It was found that, there was a relationship between CEO compensation, firm size, accounting performance, and corporate governance, except for the relationship between CEO bonus and corporate governance in management-controlled companies. The correlations between CEO compensation, firm size, accounting performance, and corporate governance among owner and management-controlled companies were ranged from weak negative to strong positive ratios.
... This was supported by Jensen and found in their study that changes in both the CEO's pay-related wealth and the value of his stock holdings were positively and statistically related to the changes in the shareholder's wealth, and the CEO turnover probabilities were negatively and significantly related to changes in shareholder wealth. Ungson and Steers (1984) believed that in the firms where the CEO had large shareholdings, long tenure, control of the top management team, or other means, the CEO can largely shape his or her pay. Similarly, Finkelstein and Hambrick (1988), believed that the relative power of the CEO may affect the height of the hurdles that are set to qualify for the contingent pay. ...
This important study in executive compensation topic investigated the importance of firm ownership on the CEO compensation system in the New York Stock Exchange (NYSE) companies. This research had compared the CEO compensation system of the owner-managed and the management-controlled companies from 2005 to 2010. The research question for this study was: is there a relationship between the CEO cash compensation, the firm size, the accounting firm performance, and the corporate governance, among the owner-managed and the management-controlled companies? It was found that, there was a relationship between the CEO salary, the CEO bonus, the total compensation, the firm size, the accounting firm performance, and the corporate governance, among the owner-managed and the management-controlled companies.
... This was supported by Jensen and found in their study that changes in both the CEO's pay-related wealth and the value of his stock holdings were positively and statistically related to the changes in the shareholder's wealth, and the CEO turnover probabilities were negatively and significantly related to changes in shareholder wealth. Ungson and Steers (1984) believed that in the firms where the CEO had large shareholdings, long tenure, control of the top management team, or other means, the CEO can largely shape his or her pay. Similarly, Finkelstein and Hambrick (1988), believed that the relative power of the CEO may affect the height of the hurdles that are set to qualify for the contingent pay. ...
This study investigated the CEO Compensation system of the NYSE Technology companies. It attested the relationship between the CEO compensation, the firm size, the accounting performance, and the corporate governance. The research question for this study was — is there a relationship between the CEO cash compensation, the firm size, the accounting performance, and the corporate governance? It was found that there was a relationship between the CEO salary, the total CEO compensation, the firm size, the accounting performance, and the corporate governance. It was found that there was no relationship between the CEO Bonus, the firm size, and the firm performance.
... This was supported by Jensen and Murphy (1990) who found in their study that change in both the CEO's pay and the value of his stock holdings were positively and statistically related to changes in the shareholder's wealth; and CEO turnover probabilities were negative and significantly related to changes in shareholder wealth. Ungson and Steers (1984) believed that firms where the CEO had large stock holdings, long tenure, control of top management team, or other means, a CEO can largely shape his or her pay. Similarly, Finkelstein and Hambrick (1988), believed that the relative power of a CEO may affect the height of the hurdles that are set to qualify for contingent pay. ...
This study investigated the CEO Compensation system of the Toronto Stock Exchange (TSX/S&P) Retail companies. It attested the relationship between the CEO compensation, the firm size, the accounting performance, and the corporate governance, from the period 2005 to the period 2010. The totaled of the ten retail companies were selected through the stratified sampling method from the TSX/S&P index. The total of the nine models were created to address the following research question. The research question for this study was: is there a relationship between the CEO cash compensation, the firm size, the accounting firm performance, and the corporate governance? It was found that there were relationships: between the CEO salary, the CEO bonus, and the firm size; and between the CEO salary, the CEO bonus, the CEO total compensation, and the firm performance. However, it was found that there were no relationships: between the CEO total compensation and the firm size; and between the CEO salary, the CEO bonus, the CEO total compensation, and the CEO power.
... Referring to Jensen and Murphy (1990) and Aggarwal and Samwick (1999b), this paper uses current change in shareholder wealth ( t SH ) as the indicators of market performance measurement. The formula is as follows: Ungson and Steers (1984) showed that when CEO is familiar with the members of the board, CEO's compensation designed by the audit committee would not only depend on CEO's performance, but also on political relations. Thus, this paper uses the information whether the President serves as the member or the chair of the board to proxy for the relation between the President and the board. ...
This paper is to explore the determinants of the relative sensitivity of accounting and market performance measures with top executive stock-based compensation, including the growth opportunity, size, risk and financial leverage of the corporation. Contrast to existing literature, the results show that for firms with diverse characteristics, the relative importance of accounting and market performance measures in top executive stock-based compensation exhibits significantly different. Additionally, the finding indicates that corporations would substitute the internal accounting performance measure for external market performance measure to evaluate top executive actions when they confront greater uncertainty of the external environment and debtholders.
... This notion is however not completely new in the executive pay literature. The social embeddedness of pay practices can also be found in theories such as figurehead theory (Ungson and Steers 1984), implicit contracting (Baker, Gibbons, and Murphy, 2002;Kidder and Buchholtz, 2002;Rosen, 1985) and other theories based on social comparisons (See e.g. O'Reilly, Main, and Crystal 1988;Simon, 1957). ...
Executive compensation research has a long tradition. Indeed, top management pay issues have attracted both researchers and popular press for at least 80 years (e.g., Taussig and Baker, 1925) and have generated an enduring debate across different fields (Barkema and Gomez-Mejia., 1998; Gomez-Mejia and Wiseman, 1997; Werner and Ward, 2004). The dominant paradigm in this line of inquiry is the perfect contracting thesis as introduced by Jensen and Meckling (1976). This approach, most often simply referred to as agency theory, is based on an economic framework in which contracting and pricing mechanisms serve as the mechanisms by which executive pay is set. Executive pay is set on the basis of arm's length contracting between shareholders, or their representatives, and management. A positive relationship between executive compensation and firm economic performance is one of the standard predictions of agency theory. Pay-for-performance rewards to managers are meant to align the interest of the manager with that of the shareholder since these rewards provide incentives to managers to initiate strategies that boost future economic performance (Eisenhardt, 1989; Fama & Jensen, 1983; Jensen & Meckling, 1976). This line of research is more popularly known as "pay-performance-sensitivity" research (Gomez-Mejia and Wiseman, 1997). However, the large body of empirical literature surrounding this relationship has only provided weak support for this link at best. For instance, the authors of what is perhaps the biggest study in the field (Jensen & Murphy, 1990b), which considered a total of 10,400 CEO years of compensation and performance data, indicated disappointment for the low pay-for-performance sensitivity found. Their finding indicated that for every $1,000 dollar change in firm value, the CEO's salary changes by 2 cents. More recently, Tosi and colleagues (2000) conducted a meta-analytic review (137 articles or unpublished manuscripts) to test the relationship between firm size, performance, and CEO compensations. Results of this study indicated that firm size accounted for more than 40% of the variance in total CEO pay, while firm performance only explained less than 5% of the variance. As a whole, firm economic performance has appeared as a weak determinant of executive compensation. Not surprisingly, the failure to identify a robust relationship between executive compensation and firm performance led Gomez-Mejia (1994) to compare this relationship to the search for the "Holy Grail".
... For the governance dimension, Core et al. [10] show that firms with weak governance structure have a more severe agency problem and the CEOs of such firms have higher compensation. Studies have also shown that as the executives hold more shares of the firm, the executives are more capable of influencing its incentive plan (e.g., Ungson and Steers [37], Finkelstein and Hambrick [15]). Also, letting the executives to hold more shares of the firm could align the interests of the executives with the shareholders (e.g., Jensen and Murphy [24]). ...
This paper investigates the association between executive incentive plans and firm per-formance by using an artificial neural network. Our results show that, we can accurately associate the executives' incentive plan with the firm's performance more than 70% of the time for the firms with the best and the worst performance. Our findings also suggest that (1) the importance of the components of the incentive plan changes from salary to bonus, stock awards and stock options over time, (2) accounting-based performance measure is associated with EPS while market-based performance measure is associated with the market-to-book ratio, and (3) when firms have higher uncertainty, they rely less on stock/option incentives. Finally, the simplicity of the model can help a firm better design or change the compensation scheme of the executives in order to perform better.
... Recent literature reviews and summaries are provided by Devers et al. (2007) and Gomez-Mejia et al. (2010: 117-140). Major theories include agency theory (Jensen and Meckling, 1976;Jensen and Murphy, 1990), tournament theory (Lazear and Rosen, 1981), human capital theory (Combs and Skills, 2003), the managerial power hypothesis (Bebchuk et al., 2002), institutional theory (Balkin, 2008), political theories (Ungson and Steers, 1984) and fairness theories (Wade et al., 2006). Filatotchev and Allcock (2010) propose a contingency framework that conceptualises executive pay in terms of organisational context, complementarity of governance systems and national institutional environments, but this approach lacks theoretical parsimony (see Gomez-Mejia et al., 2005: 1512. ...
Research on senior executive reward has typically explored the connection between pay, performance and the alignment of interests of executives and shareholders. This article examines the relationship between reward and motivation, drawing on the psychological, behavioural economics and decision‐making literatures. Based on an empirical study of FTSE 350 senior executives, the research examines whether long‐term incentive plans are an effective and efficient way of motivating executives, taking into account risk, time discounting, uncertainty and fairness. The article concludes that the way executives frame choices, perceive value, assess probability, evaluate temporal effects and respond to uncertainty means that long‐term incentive plans (LTIPs) are generally not efficient and are often not effective in meeting their objectives. It proposes that, in its current form, agency theory does not provide a sound basis for modelling senior executive reward, and suggests five areas for development.
A teoria da agência é uma importante teoria, ainda que seja controversa. Este artigo traz uma revisão sobre a teoria da agencia, suas contribuições para a teoria das organizações e do trabalho empírico existente bem como desenvolve proposições testáveis. As conclusões são de que a teoria da agência oferece uma visão única sobre sistemas de informação, incerteza dos resultados, incentivos risco e é uma perspectiva empírica válida, principalmente quando combinada com perspectivas complementares. A recomendação principal é incorporar uma perspectiva agência em estudos sobre os muitos problemas que têm uma estrutura cooperativa.
This paper attempts to understand whether there is alignment between executive remuneration and shareholder interests in publicly listed companies in Australia. The issue is analysed over three distinct stages of an economic cycle, and the panel fixed effects method is used to estimate the performance-remuneration models. The study finds that the long-term compoents of the remuneration package would highly incentivize CEOs and executive directors. Still, the fixed salary component exerts no such enticement for them to maximize shareholders’ wealth. This new information could be useful for Australian firms as well as for firms in Asia Pacific countries due to the close relationship they share with the Australian firms.
We examine the impact of firms’ complexity on pay differentials within the top management team. Using the basic model of tournament theory and its extensions, we suggest competing hypotheses. The basic model predicts a positive relation between complexity and the pay spreads across top management. model extensions incorporate behavioral consequences of tournament-like compensation structures. As collaboration gains importance with complexity, these models predict a negative relation between complexity and pay spreads. Our results show stronger support for the basic model. Hence, firms with high levels of complexity tend to implement tournament solutions, thereby neglecting their potential pitfalls.
Managers of contemporary publicly held organisations typically are not the owners. Rather, a specialisation of responsibilities has evolved whereby managers coordinate activities within the firm and position it appropriately in its competitive environment; the owners of the firm bear financial risk in the hope of retaining the difference between the firm’s productive cash-flows and the outflows of its promised payments (Fama and Jensen 1983a, 1983b). As the firm’s owners would suffer tremendous financial losses if the firm failed, they tend to diversify their holdings across a variety of firms as a hedge against such a possibility. As a result, the individual owner has little interest in conducting, or even closely monitoring, the day-to-day activities in all of the firms in which he or she has a financial interest (Fama 1980). The owners hire boards of directors who, in turn, hire managers to perform these duties.
This research study investigated the effect of CEO age on CEO compensation using accounting performance as an independent variable or benchmark on NYSE companies from 2005 to 2010. The quantitative research and stratified sample methods were selected for this research. The research question for this study was: is there a relationship between CEO compensation and CEO age using accounting performance as a benchmark. It was found that there was a relationship between CEO salary, CEO bonus, CEO total compensation, CEO age, and accounting performance between CEO age groups except for the relationship between: CEO bonus and accounting performance in CEO age group from 40 to 45 years; CEO bonus and accounting performance in CEO age group from 51 to 55 years; and CEO bonus and accounting performance in CEO age group from 61 to 65 years. The correlations between CEO salary, CEO bonus, CEO total compensation, CEO age, return on assets, return on equity, earnings per share, cash flow per share, net profit margin, common stocks outstanding, book and market values of common stocks outstanding were ranged from weak negative to strong positive ratios.
This study investigated the effect of the CEO Roles with the Accounting Performance, towards the CEO Compensation System in the New York Stock Exchange (NYSE) companies, from the period 2005 to 2010. This study had selected one hundred and twenty companies through the stratified sampling method. Since this study was throughout empirical in nature as such the quantitative research methodology was applied. The research question for this study was: is there a relationship between the CEO Cash Compensation and the Accounting Firm Performance, in the companies whereby the CEO was performing duality role as CEO & Chairman and in the companies whereby the CEO was only positioned as stand-alone?. It was found that, there was a relationship between the CEO Salary, the CEO Bonus, the Total Compensation, and the Accounting Firm Performance, under both roles.
This article describes new micro-foundations for theorizing about executive compensation, drawing on the behavioral economics literature and based on a more realistic set of behavioral assumptions than those that have typically been made by agency theorists. We call these micro-foundations “behavioral agency theory.” In contrast to the standard agency framework, which focuses on monitoring costs and incentive alignment, behavioral agency theory places agent performance at the center of the agency model, arguing that the interests of shareholders and their agents are most likely to be aligned if executives are motivated to perform to the best of their abilities. We develop a line of argument first advanced by Wiseman and Gomez-Mejia and put the case for a more general reassessment of the behavioral assumptions underpinning agency theory. A model of economic man predicated on bounded rationality is proposed, adopting Wiseman and Gomez-Mejia’s assumptions about risk preferences, but incorporating new assumptions about time discounting, inequity aversion, and the trade-off between intrinsic and extrinsic motivation. We argue that behavioral agency theory provides a better framework for theorizing about executive compensation, an enhanced theory of agent behavior, and an improved platform for making recommendations about the design of executive compensation plans.
Šiame straipsnyje Lietuvos viešojo sektoriaus vadovų atlygiui ir jo pokyčiams įvertinti naudojama viešosios tarnybos susitarimų modelio atlygio dimensija, kuri apima skirtingus požiūrius į materialų atlygį ir nematerialius motyvuojančius veiksnius. Straipsnyje yra aptariama teisinio reglamentavimo kaita, tarptautiniame kontekste įvertinamas Lietuvos viešojo sektoriaus vadovų materialus atlygis, nagrinėjami jo skirtumai skirtingo tipo Lietuvos viešojo sektoriaus organizacijose ir vadovo atlygio santykis su organizacijos darbuotojų darbo užmokesčiu. Taip pat įvertinamas politikų ir pačių vadovų požiūris į dabartinę atlygio sistemą ir apžvelgiama nematerialių motyvuojančių veiksnių visuma. Remiantis šia analize siekiama nustatyti, kokiam tipui viešosios tarnybos susitarimų modelio požiūriu priskirtina Lietuvos viešojo sektoriaus atlygio sistema, ir įvertinti, ar politikams ir viešojo sektoriaus organizacijų vadovams ši sistema yra priimtina, t. y. ar egzistuoja viešosios tarnybos susitarimas dėl atlygio. Taip pat parodoma, kad Lietuvos viešojo sektoriaus atlygio sistemai didžiausią įtaką darė ne iš anksto suplanuota viena ar kita logika grįsta reforma, o inkrementiniai politiniai sprendimai, ekonominės situacijos pokyčiai ir teismų praktika.
This book integrates and assesses the vast and rapidly growing literature on strategic leadership, which is the study of top executives and their effects on organizations. The basic premise is that, in order to understand why organizations do the things they do, or perform the way they do, we need to comprehend deeply the people at the top-their experiences, abilities, values, social connections, aspirations, and other human features. The actions-or inactions-of a relatively small number of key people at the apex of an organization can dramatically affect organizational outcomes. The scope of strategic leadership includes individual executives, especially chief executive officers (CEOs), groups of executives (top management teams, or TMTs), and governing bodies (particularly boards of directors). Accordingly, the book addresses an array of topics regarding CEOs (e.g., values, personality, motives, demography, succession, and compensation); TMTs (including composition, processes, and dynamics); and boards of directors (why boards look and behave the way they do, and the consequences of board profiles and behaviors). The book synthesizes what is known about strategic leadership and indicates new research directions.
The article deals with contemporary executive's rewards system in the Lithuanian public sector and its changes over time. The analysis bases on the reward dimension of the Public Service Bargains (PSBs) model which includes different approaches to the tangible and intangible rewards elements. This theoretical approach was applied to the analysis of changes in legal framework, to the assessment of Lithuanian public sector executive's tangible rewards in the international context, differentiation among different types of the Lithuanian public sector organizations and inside an organisation itself. Evaluated was the approach of politicians and high public officials to the contemporary executive's reward system and provided an overview of the intangible rewards elements in the Lithuanian public sector. This article aims at determining which type of public service bargain on rewards is attributable to the contemporary executive's rewards system in the Lithuanian public sector and at evaluating how acceptable this bargain is to politicians and public sector executives. It is also shown that the Lithuanian public sector executive's reward system was largely shaped by incremental policy decisions, changes in economic conditions and court decisions, but not by pre-planned reforms.
This paper develops a new perspective on results-based incentive schemes for non-CEO managers. It shows that it is possible to establish incentive schemes that take into account both the actual output obtained and the forecast figure previously established as a target, without the negative consequences derived from the perverse loop of hiding-ratchet effects. A general linear two-staged scheme is proposed. In addition, relevant properties of this incentive system are stated that show how principals (corporate management) may determine the expected forecasting behavior of agents (executive officers) by suitably choosing the scheme parameters according to a simple set of rules. Copyright
CEO severance has captured the attention of a wide array of audiences, yet it remains largely unexplored by management scholars. In this article we offer a rigorous theoretical examination of CEO severance with the goal of developing a foundation for a systematic research agenda. In particular, we consider if, and how, severance agreements can be effective in serving the interests of both CEOs and shareholders. We argue that severance agreements have potential value as both an executive recruitment and a governance tool but that the way they are conventionally structured undermines the value shareholders realize from them. The implications of structure have been almost entirely overlooked by scholars, perhaps because the influence of compensation consultants has left little variance in how severance agreements are implemented across firms. We address this gap by theorizing about how severance agreements could be structured to effectively generate value for executives and shareholders. To do this, we introduce a categorization of key dimensions of CEO severance agreements and consider how each of these dimensions can be structured to facilitate CEO recruitment while simultaneously mitigating future governance problems. Our propositions offer new opportunities for governance and compensation scholars to link CEO severance agreements to important organizational outcomes.
This research study investigated the effect of CEO age on CEO compensation using accounting performance as an independent variable or benchmark on TSX/S&P companies from 2005 to 2010. The quantitative research and stratified sample methods were selected for this research. The research question for this study was: is there a relationship between CEO compensation and CEO age using accounting performance as a benchmark. It was found that there was a relationship between CEO salary, CEO bonus, CEO total compensation, CEO age, and accounting performance among all CEO age groups. The correlations between CEO salary, CEO bonus, CEO total compensation, CEO age, return on assets, return on equity, earnings per share, cash flow per share, net profit margin, common stocks outstanding, book and market values of common stocks outstanding were ranged from moderate negative to strong positive ratios.
Internal, organizationally based mechanisms of corporate control and external, market-based control mechanisms can be employed to help align the diverse interests of managers and shareholders. After reviewing the related work in organization theory and financial economics, this paper articulates the strengths and shortcomings of both types of control mechanisms; it also identifies a variety of managerial entrenchment practices that managers can use to compromise these mechanisms. A theoretical framework is developed next that explicates the interrelationships between and among these corporate control mechanisms. A number of research opportunities that span the disciplines of organization theory and financial economics are identified.
This study investigates the relationship between the Chief Executive Officer (CEO) cash compensation and the firm size in the TSX/S&P index companies from the period 2005 to the period 2010. The totaled of the one hundred and twenty companies were selected through the stratified sampling method from the TSX/S&P index. The total sampling population was divided into three groups: the small, the medium and the large The research question for this study was — is there a relationship between the CEO cash Compensation and the firm size? To answer this question, the sixteen statistical models were created and accordingly sixteen attestations were performed. Overall, all the attestations results were found to have the relationship between the CEO cash compensation and the firm size. The correlations among the sub-variables of the CEO cash compensation — the salary and the bonus, and the sub-variables of the firm size — the total sales and the total number of employees were found to be ranged from the weak negative to the strong positive ratios.
This article develops and applies a new framework for understanding and interpreting the breadth of executive compensation research and theory. This framework sorts the literature along three dimensions that reflect three basic issues in compensation design: how to pay (specifying the mechanism for linking pay criteria to pay consequences), when to pay (specifying the criteria for awarding pay), and what to pay (form of pay consequence). This framework helps to highlight areas where executive compensation research has stalled, areas it has ignored, as well as providing direction for re-energizing the field by outlining questions for future research and theory building.
Through a meta-analytic review of the empirical literature on the determinants of CEO pay, this study tests the hypothesized relationships between firm size, performance, and CEO pay. We show that firm size accounts for more than 40% of the variance in total CEO pay, while firm performance accounts for less than 5% of the variance. We also show that pay sensitivities are relatively similar for both changes in size (5% of the explained variance in pay) and changes in financial performance (4% of the explained variance in pay). The meta-analysis also suggests that moderator variables may play an important role, but we were unable to test for this.
This study investigated CEO compensation system of Canada’s top CEO compensation sectors, energy, metal, and mining. It tested the relationship between CEO cash compensation, firm size, accounting firm performance, and corporate governance in TSX/S&P index companies from 2005 to 2010. The totaled of fifty one Canadian energy, metal, and mining companies were selected through random sample method from TSX/S&P index companies list. The research question for this study was - is there a relationship between CEO cash compensation, firm size, accounting performance, and corporate governance in energy, metal, and mining industries?. To answer this question, nine statistical models were created. It was found that there was a relationship between CEO salary, CEO bonus, total compensation, firm size, accounting performance, and corporate governance in energy, metal, and mining. The correlations between CEO cash salary, firm size, and accounting performance were good to strong positive ratios; the correlation between CEO salary and corporate governance had weak mixed ratios; the correlations between CEO bonus, total compensation, and firm size had strong positive ratios; the correlations between CEO bonus, total compensation, firm performance, and corporate governance were ranged from weak negative to strong positive ratios.
Index Terms: CEO Compensation, Accounting Performance, Firm Size, Corporate Governance, CEO Power, Energy and Mining Compensation, and CEO Bonus.
Although newly appointed CEOs are commonly viewed as the oracles of innovation, whether, how, and when CEO successions shape their firm’s post-succession innovation trajectory remains theoretically vague and empirically equivocal. We advance an exploitation-exploration framework to reconcile divergent insights and elaborate understanding. Because exploitative and exploratory innovations rely upon distinct managerial skills, knowledge, and cognitions, we argue that outsider and insider CEOs shape post-succession innovation in countervailing ways. Outsiders are more apt to embrace exploratory innovations than insiders, who are constrained by existing strategic commitments, established paradigms, and social embeddedness. At the same time, outsiders may be less capable than insiders to cultivate exploitative innovations because of unfamiliarity with the firm’s resources. We then elaborate these effects within an agency boundary of post-succession stock option compensation. We argue that while new outsider CEOs’ predilection to exploit and explore is relatively intransient to the proportion of stock option compensation in early years of tenure, option compensation can shift new insider CEOs’ attention from exploitative to exploratory innovations. From a longitudinal dataset of 495 US firms, we find the differential effects of outsider and insider CEOs on post-succession innovation trajectory, as well as the role of option compensation in bounding these effects.
This research examines the hypothesis that corporate organizations experiencing inside succession in the office of the president exhibit less organizational change than firms undergoing outside succession. The type of succession is related to a combined measure of organizational change based on position shifts and personnel turnover in the executive role constellation. The research also controls for back-ground effects from five potentially confounding variables: organizational performance, successor's style of leadership, intensity of operations, organizational size, and administrative growth in the industry. Measurable events of the succession process of the organization are emphasized, rather than the direct observation of social organizational patterns that emerge in the executive group itself. The data base is derived from 208 chemical and allied product corporations which have experienced presidential succession at least once in the ten-year period of analysis. The analysis of the data using the partial gamma coefficient and a modification of the chi-square statistic supports the basic hypothesis.
The board of directors is considered as an instrument for dealing with the organization's environment. In a random sample of eighty nonfinancial corporations, elements of board size and composition are shown to be systematically related to factors measuring the organization's requirements for coopting sectors of the environment. Organizations that deviate more from an empirically estimated optimal board structure equation are likely to perform more poorly, compared to industry standards.
In a study of 96 independent electric utilities, the correspondence between dimensions of board of director size and composition and variables of the external environment is examined. There is a correlation between board of director composition and the demography of the area in which the utility is regulated, and cooptation is influenced by the friendliness or unfriendliness of the regulatory environment. While data indicate that the concept of "regulatory climate" has some empirical validity, no conclusive evidence was found on the efficacy of cooptation as a strategic device for managing the organization's relations with the environment. The board of directors may be a mechanism for integrating the organization into its environment, though no conclusive evidence was found in the present study.
Summary of my thesis findings for practitioners.
Describes a hypothetical situation in a textile manufacturing plant and presents three alternative letters prepared by management for possible distribution to the plant's employees. Three guest commentators discuss the probable impact of the different letters and comment on the advisability of communicating with plant employees in such a manner. (JG)
Corporations often find it difficult to carry out their strategies because they have executive compensation systems that measure and reward performance in a way that ignores or even frustrates strategic thinking, planning, and action. In particular, reward systems rarely emphasize the long run adequately, nor are they well coordinated with the methods and objectives of other management systems.
This article describes three methods that can be used to match rewards with accomplishment of strategic goals: the weighted‐factor method which weights various performance measurements according to strategic objectives, the long‐term evaluation method, which ties compensation to goals achieved over a multiyear period, and the strategic funds deferral method which varies from the conventional financial accounting model for the measurement of performance.
The article recommends that all three methods be combined into a single system in which the rewards for senior managers throughout the company are determined by the three methods in different proportions according to those factors that constitute successful performance in their positions.
Sumario: The interrelationship of diversification strategy, organizational structure, and economic performance in large American industrial corporations is the subject of this study. In addition to investigating the relative prevalence of various types of strategy and structure, the relationship between strategy and structure, and the association between these two variables and economic performance, this study will be concerned with the validation of a research method that combines the managerially meaningful but essentially descriptive concept of diversification strategy with the analytic power of statistical techniques applied to large samples
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