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The Structure of Organizational Incentives
Abstract
To improve understanding and design of organizational incentives, we used confidential compensation data obtained for four distinct organizational levels (ranging from plant manager to corporate chief executive officer) to evaluate the ability of tournament, managerial power, and agency theories to explain these observed compensation data. Our results suggest that organizational incentives are most appropriately characterized by a combination of these models, rather than being completely described by a single theoretical description.
... Such hypotheses were tested in the business context: Lambert et al. (1993) and Conyon et al. (2001) found convex relationships between executive pay and organizational levels. However, in business, there are significant nonmonetary incentives for the contestants. ...
... The theory is about differences in the level of prizes, not differences in log of prizes. Lambert et al. (1993) Lambert et al. (1993) include several variables identifying the size of the company, group or division overseen by a specific executive as a determinant of the salary; Conyon et al. (2001) account for firm size using total capital employed. Our totalprizespaid i is included to capture this size effect. ...
... The theory is about differences in the level of prizes, not differences in log of prizes. Lambert et al. (1993) Lambert et al. (1993) include several variables identifying the size of the company, group or division overseen by a specific executive as a determinant of the salary; Conyon et al. (2001) account for firm size using total capital employed. Our totalprizespaid i is included to capture this size effect. ...
Tournament theory has been supported by many pieces of empirical research in different fields. However, tournament theory literature focuses largely on the incentives of individual competitors. In our paper we develop a model the organizer choice between team and individual tournament and suggest a model of rank-order tournaments between teams. We test its implications using eSports (competitive video gaming) data. We show that both team and individual results follow tournament theory, however, there is a difference between the motivation of groups and individuals. Our study provides insights on the optimal reward structure, which should maximize effort of contestants, and, in the case of sports tournaments, entertainment value of the events.
... Management and finance scholars have shown increasing interest in the phenomenon of pay differentials between a CEO and other top executives of the firm, i.e., CEO-TMT pay gap (Henderson & Fredrickson, 2001 If stronger board control results in stronger board power which negatively influences CEO compensation (Boyd, 1994;Chhaochharia & Grinstein, 2009), how does stronger board power influence the CEO-TMT pay gap? Incumbent theoretical debate still does not reach a consensus. On the one hand, tournament theory suggests that a stronger board should not suppress larger CEO-TMT pay gap which motivates a CEO to do a better job (Lambert et al., 1993) and consequently benefits the firm (Burns, Minnick, & Starks, 2017); on the other hand, agency theory proposes that stronger board should discourage larger CEO-TMT pay gap which can be considered as a result of CEO rent-seeking (Bebchuk et al., 2011). Consequently, we are uncertain about the relationship between board power and the CEO-TMT pay gap. ...
... Moreover, if stronger CEO power facilitates higher CEO compensation, does a powerful CEO capitalize his or her power to increase the CEO-TMT pay gap? In this case, agency theory predicts that a larger CEO-TMT pay gap serves the self-interest of the CEO and therefore stronger CEO power should lead to a larger pay gap; tournament theory suggests that a larger CEO-TMT pay gap is beneficial because of its motivational effect (Lambert et al., 1993). Thus, both agency theory and tournament theory lead to the same prediction that stronger CEO power should have a positive relationship with the CEO-TMT pay gap. ...
... In turn, we empirically test the contrasting predictions regarding the relationships among board power, CEO power, board-CEO power imbalance, and the CEO-TMT pay gap. Particularly, we conduct dynamic panel analyses with a GMM estimator (Roodman, 2009) Lambert et al., 1993). Theoretically, our findings suggest that agency theory provides better predictions for the general relationships among board power, CEO power, and the CEO-TMT pay gap. ...
Extant studies theoretically debate and empirically present inconsistent findings of the factors that influence CEO-TMT pay gap. In this study, we extend the research of the antecedents of CEO-TMT pay gap by directly comparing different theoretical predictions regarding the impacts of board power and CEO power on CEO-TMT pay gap. Conducting dynamic panel analyses with GMM estimator on a sample of 2,117 firm-year observations in the S&P 500 between 2006 and 2013, we empirically test the contrasting predictions regarding the relationships among board power, CEO power, board-CEO power imbalance, and CEO-TMT pay gap. In turn, we find that board power is negatively associated with CEO-TMT pay gap and CEO power has the opposite effect. Moreover, the stronger board power against CEO power, the smaller CEO-TMT pay gap becomes. Our theoretical analyses and empirical investigations contribute to the existing theoretical debate among agency theory, tournament theory, and managerial power theory regarding the determinants of CEO-TMT pay gap. Consistent with agency theory predictions rather than tournament theory ones, our empirical results suggest that boards are conscientious about the potential negative effects of larger CEO-TMT pay gap and therefore stronger boards usually do not rely on larger CEO-TMT pay gap to incentivize CEOs. This study also contributes to corporate governance literature by offering new aggregated proxies for board power and CEO power which reflect the multidimensional features of board-CEO relationships.
... In firms that are closely held, controlling shareholders are in a position to watch over their executives and improve the governance of the firm. They can offset the influence CEOs may have over their own pay, which leads to lower rent extraction (Dyl, 1988;Lambert et al., 1993;Hambrick and Finkelstein, 1995;Cyert et al., 2002;Chhaochharia and Grinstein, 2009). They can also reduce agency issues with managers, resulting in a lower recourse to equity-based plans and thereafter lower levels of total pay (Beatty and Zajac, 1994;Lippert and Moore, 1995;Mehran, 1995;Core et al., 1999). ...
... Empirical studies find that large shareholders do play a monitoring role. They are able to curb the influence of powerful CEOs on the design of their own pay, and they reduce agency costs in the form of lower levels of CEO pay (Dyl, 1988;Lambert et al., 1993;Hambrick and Finkelstein, 1995;Cyert et al., 2002;Chhaochharia and Grinstein, 2009). They are also less likely to have recourse to alternative mechanisms of monitoring, such as performance-based pay (Beatty and Zajac, 1994;Lippert and Moore, 1995;Mehran, 1995;Core et al., 1999). ...
... According to the standard labor market perspective, the marginal contribution of CEO talent to firm value is greater in larger firms and justifies higher levels of pay (Terviö, 2008;Gabaix and Landier, 2008). Also as firm size grows, the complexity of the organization and the number of hierarchical levels increases and pushes top compensation upwards (Lazear and Rosen, 1981;Lambert et al., 1993). Similarly, the ℎ denotes the complexity and maturity of a firm's organization. ...
The intensity of monitoring and its effects on the design of CEO pay can vary depending on the degree of ownership and the seniority of controlling shareholders. This study uses a panel threshold model to identify threshold effects in these two dimensions of control in French listed companies. The results show firms can be deemed to be non-controlled below a threshold of 10% of equity; above that, three regimes of controlled firms are identified: influential (10% to 33%), dominant (33% to 45%) and majority (above 45%) controls. One threshold point in the seniority of control – at about eight years after taking control – separates out new and long-term controls. Non- and newly-controlled firms are found to rely on optimal contracting to deal with agency and retention issues, while influential and majority controlling shareholders bring better governance and effective monitoring. Located at an intermediate level of control, dominant controlling shareholders show evidence of entrenchment.
... Non-CEO executives 1 -who fill similar managerial positions yet serve different functional areas-are compensated based on their experience, area(s) of expertise, and/or related factors (Lambert, Larcker, & Weigelt, 1993), which inherently creates differences in their pay. This form of pay dispersion, known as horizontal pay dispersion 2 , motivates some but creates perceptions of injustice for others (Pissaris et al., 2017). ...
... As such, pay differentials are expected and justifiable to a degree (e.g. Fredrickson et al., 2010;Lambert et al., 1993). However, pay differentials also reflect nuances in executive status (Main et al., 1993) and lead to intra-team comparisons that may negatively affect collaborative efforts. ...
... Investigations that find positive effects on performance have relied on an array of conceptual approaches. In one line of thought, the strategic design of the TMT's compensation reflects distinctive managerial power and individual competencies associated with unique managerial positions (Lambert et al., 1993;Pepper, Gore, & Crossman, 2013;Rosen, 1986). Greater pay dispersion is thought to elicit desire from executives to increase their compensation and/or gain a more prominent organizational standing (Eriksson, 1999;Main et al., 1993). ...
Debate persists regarding the effects of executive pay dispersion on firm performance given that conflicting findings have plagued the literature. We aim to reconcile previous inconsistencies by taking a more nuanced approach and exploring the effects of explained and unexplained executive pay dispersion on the firm's short-and long-term performance. Using a longitudinal sample of public firms over a 12-year period, we find that unexplained pay dispersion among executives-indicating pay inequity-negatively affects short-term firm performance while explained pay dispersion-indicating pay inequality-positively affects long-term firm performance. The findings help resolve prior inconsistencies associated with understanding the relationship between executive pay dispersion and firm performance. Accordingly, we advance research by demonstrating the importance of measuring pay dispersion types and accounting for the temporal nature of firm performance.
https://www.tandfonline.com/eprint/ZCPGXWRHQ45BF7PVMNN4/full?target=10.1080/09585192.2021.1925324
... Lazear and Rosen (1981) proved that if the agent's performance is relevant, the rank-order tournaments can eliminate more uncertain factors, to make the principal's judgment on the manager's effort level more accurate. When greater rewards are provided for high performers, tournament theory suggests that improved effort and performance can be attained (Lambert et al., 1993). The introduction of performance-related pay systems typically leads to an increase in the dispersion of wages. ...
... According to the tournament theory, enterprises should increase the compensation gap between position levels in order to reduce the principal-agent cost and improve corporate performance. Leonard (1990), Lambert et al. (1993), and Eriksson (1999) found that when the internal compensation gap of senior management remains unchanged, simply increasing the compensation level of senior executives could not improve their efforts, which supports the theoretical proposition that the key to encouraging managers to improve performance is the internal compensation gap. The research of Tsou and Liu (2005) believes that when the compensation gap in the enterprise is small, the turnover rate of employees is high, which also supports the design of increasing the compensation gap. ...
This study explores the relationship between the compensation gap within the top management team (TMT) and corporate performance. We focus on how the fairness preference of the TMT moderates this relationship. The existing researches on the relationship between the compensation gap within the TMT and corporate performance are inconclusive. The reason may be that the traditional tournament theory is based on the hypothesis of self-interest preference of homo economicus. In the research, the fairness preference theory is added to the traditional tournament model, and a more realistic tournament model considering fairness preference is constructed. Based on the analysis of the theoretical model and the empirical regression analysis of the panel data of 733 non-financial A-share listed companies in Shanghai and Shenzhen stock markets from 2014 to 2020, we draw the following main conclusions: (1) There is an inverted U-shaped relationship between the TMT compensation gap and the corporate performance. Within the optimal compensation gap, there is a significant positive correlation. The larger the compensation gap, the better the corporate performance will be. When the optimal compensation gap is exceeded, there is a significant negative correlation. The larger the compensation gap, the worse the corporate performance will be. (2) The fairness preference of the TMT will weaken the correlation between the TMT compensation gap and corporate performance. Within the optimal compensation gap, the fairness preference will weaken the positive relationship between them, and when it exceeds the optimal compensation gap, the fairness preference will also weaken the negative relationship between them.
... Managerial power theory suggests that management has the power to influence the design and structure of management compensation to their benefit through their influence over the board of directors and to the disadvantage of shareholders (Bebchuk & Fried, 2004). According to tournament theory, top management has reached the highest job level in the company and thus has lost the incentive to compete with their peers to get promoted to positions with increased compensation (Lambert et al., 1993). Consequently, the MCS has to compensate for this effect (Lambert et al., 1993 Further, investors' trust may be a significant factor in determining MCS (Kanagaretnam et al., 2018). ...
... According to tournament theory, top management has reached the highest job level in the company and thus has lost the incentive to compete with their peers to get promoted to positions with increased compensation (Lambert et al., 1993). Consequently, the MCS has to compensate for this effect (Lambert et al., 1993 Further, investors' trust may be a significant factor in determining MCS (Kanagaretnam et al., 2018). Transparent disclosures and communication are recognised as increasing investors' trust (Camilleri, 2018;Hahn & Lülfs, 2014;Zarzycka & Krasodomska, 2022) and leading to positive economic effects (Elzahar et al., 2015;Jana & McMeeking, 2020). ...
Assessing whether a company is sustainable or not is challenging for investors. For this reason, it is particularly important how companies integrate and manage sustainability. This paper primarily aims to investigate the effects of implementing environmental, social and governance (ESG) key performance indicators (KPIs) in the internal management system (IMS) on ESG performance. Further, the effect of a consistent use of ESG KPIs in the IMS and the management compensation scheme (MCS) on ESG performance is examined. Using hand‐collected data of the largest German‐listed companies, this study employs t tests for differences in means and ordinary least square (OLS) regressions to study these associations. The results indicate that the implementation of ESG KPIs in the IMS increases ESG performance. In addition, the performance for environmental and social sub‐dimensions is enhanced. No significant influence of a consistent use of ESG KPIs in the IMS and the MCS on ESG performance is observed. The results highlight that implementing ESG KPIs in the IMS is a practical approach to manage sustainability and to increase ESG performance. Our findings have practical and theoretical implications for researchers, regulators and companies considering the integration of sustainability and further communicating transparently and strengthening investor trust.
... Making partner is a key milestone for candidates showing their aptitude for years. This reward is emphasized in an up-or-out promotion system (Lambert et al., 1993;Waldman, 1990). In this system, employees not promoted within a fixed period are expected to leave the firm, providing incentives to reach the next career level until attaining partner level. ...
... Historically, Big 4 audit firms were built on an up-or-out promotion system (Waldman, 1990). This system is similar to a sequential elimination tournament (Lambert et al., 1993) and implies that employees who were not promoted in a fixed period had to leave the company. ...
This study investigates who makes partner in Big 4 audit firms. Building on prior qualitative research, we conduct the first large scale study using archival data to examine the incremental importance of different individual auditor characteristics for making partner. For our analyses, we collect information on German auditors from a business-oriented social network site. We conduct a longitudinal analysis for a cohort of Big 4 senior managers and directors to identify determinants of making partner. We find that economic capital, social capital, and institutionalized cultural capital matter for making partner. Further, we find that female and foreign auditors are less likely to become partner than their counterparts. In addition, we perform a cross-sectional analysis using a larger sample of auditors to identify the distinct characteristics of Big 4 partners compared to Big 4 senior managers, Big 4 directors, and non-Big 4 partners, and find results consistent with the longitudinal analysis.
... Another relevant factor is the influence that executives may have in their own hiring and decision of its compensation package. This influence can vary depending on the shareholding structure of the company, which is a relevant variable to explain the compensation received by its executives (Tosi Jr and Gomez-Mejia., 1989;Lambert et al, 1993;Core et al., 1999;Hartzell and Starks, 2003). In addition, the board has no interest in bargaining executive compensation since they often are executives of other companies and such trading has a social cost to them (Bebchuk and Fried, 2006). ...
... The presence of foreign shareholders may be associated with lower executive compensation and performance improvement (Lambert et al., 1993;Core et al. 1999), since it can be associated with better monitoring of executives by shareholders (Tosi Jr and Gomez-Mejia, 1989). ...
This study investigates executive compensation on Brazilian companies controlled by private equity funds. Although there is a vast literature on executive compensation in many countries, there are only a few studies on executive compensation in private-equity-controlled companies in Brazil. Our analysis of 657 listed companies in Brazil from 2008 to 2011 show that private-equity-backed firms have higher individual and variable compensation, and better corporate governance standards.
... However, some studies reported a positive association between Board Independence and C.E.O. pay because the external members seem to be more influenced by C.E.O.s (Wade, O'Reilly, & Chandratat, 1990;Lambert, Larcker, & Weigelt, 1993;Boyd, 1994). In this vein, C.E.O. ...
This meta-analysis takes stock of 121 C.E.O. pay studies published between 1998 and 2018 with the objective of identifying the main drivers of C.E.O. pay from a global perspective and contributing to the agency vs managerial debate on this ground. The meta-results disclose a positive C.E.O. pay-performance correlation (the highest correlation coefficient corresponds to Earnings per share with a 34%) as the agency theory prescribes and the governance policies promote. However, firm size still predominates as the main driver of C.E.O. pay (correlation coefficient is around 44%) according to managerial premises. Moreover, our results reconcile both approaches because results of the meta-regressions suggest that larger companies and more independent boards strengthen the pay-performance association. Additional analyses of moderating factors on C.E.O. pay forces do not provide robust conclusions, though, they suggest: (1) weak impact, if any, of both the Cadbury Report and the S.O.X.; and (2) lack of homogeneity in the banking industry despite its specific regulation. ARTICLE HISTORY
... Tournament Theory (Lazear and Rosen 1981;Rosen 1982;Lambert et al. 1993;Lyness and Judiesch 2001;Pfeifer 2011;Messersmith et al. 2011;Connelly et al. 2014), which has frequently been employed to explain compensation structures, has extended the agency model by proposing that principals structure a company's management hierarchy as a rank-order tournament, thus ensuring that the highestperforming agents are selected for the most senior management positions. This theory postulates that executives compete for places in a company's upper echelons via a sequential elimination tournament. ...
Despite the increased interest in entrepreneurship across scientific and professional fields over the years, existing research in female entrepreneurship has remained largely disjointed in the academic literature, due to the different theories, approaches, methodologies, and research questions addressed, making it difficult to take stock of what is known about women’s entrepreneurial activity. This paper aims at deepening the contribution of female entrepreneurship to organizational success/resilience, and so to the economic recovery, by conducting a review of literature and a content analysis of the most frequent topics on the subject and their chronological evolution over time.This paper, on the one hand, provides a structured reference point to carry research on gender entrepreneurship forward into specific sub-areas. On the other hand, it offers insights about the opportunities and barrier that can explain the women’s interest and motivation for entrepreneurship encompassing a range of aspects (i.e., performance, governance, disclosure, CSR), encouraging them to become effective entrepreneurs and sustain the growth in our economies and societies.KeywordsLiterature reviewFemale entrepreneurshipGovernancePerformanceDisclosure
... Consistent with this view, Abeler et al. (2010Abeler et al. ( , p 1300 contended that "whenever workers differ in their performance, horizontal wage equality violates the equity principle since a higher effort is not rewarded with a higher wage". Therefore, it is asserted that disparity in horizontal pay is reasonable to an extent (Lambert et al. 1993). The agency perspective also favors pay differentials in the case when it is more costly to monitor the actions and behavior of executives (Arend 2019). ...
The paper has two main objectives: one, to investigate if inter-bank horizontal dispersion in the remuneration of executives has any significant influence on bank performance. And two, to explore various situations with respect to board quality, agency cost, and government ownership under which the dispersion-performance nexus is moderated. The paper employs a two-step system GMM of (Blundell and Bond, Journal of Econometrics 8:115–143, 1998) to account for the possible endogeneity issues, and Driscoll–Kraay’s non-parametric matrix estimator to account for cross-sectional dependence. The findings show that horizontal pay dispersion has a negative influence on bank performance. It produces evidence in favor of the “equity fairness theory” that higher pay dispersion would incentivize them to engage in excessive risk-taking for maximizing their personal interests, which emerges to be detrimental to the bank’s performance. Further evidence of moderating effect shows that in the presence of effective board oversight, pay dispersion exerts a favorable influence on the performance of Indian banking firms. The research has significant policy ramifications for regulators to apprehend the undesirable implications of pay dispersion on bank performance and initiate quick action to scrutinize the governance practices of higher-paying banks.
... The heterogeneity in personalities, leadership styles, communication skills and strategic vision between CEOs and CFOs can lead to animosity or mistrust between these two most senior individuals in TMTs. The effective power the CEO has over the CFO can be derived from various sources, including hierarchical structure, the CEO being a blockholder, the perceived loyalty of others to the CEO and the CEO's personality and prestige (Adams et al., 2005;Feng et al., 2011;Haleblian and Finkelstein, 1993;Lambert et al., 1993). Friedman (2014) and Feng et al. (2011) (Hambrick and Mason, 1984;Cannella et al., 2009), and as a TMT protagonist, the CFO is primarily responsible for the strategic allocation of financial resources through their depth of power. ...
This thesis investigates the relationships between strategic leaders and innovation performance as well as the ways in which governance mechanisms influence that relationship. Specifically, the first core chapter inspects the associations between a powerful CFO and innovation performance, and the effect of financial slack and CEO power on the association in US high-technology listed firms from 1998 to 2018. The findings show that a powerful CFO is associated with greater innovation performance and is further strengthened when firms have higher levels of financial slack. This implies that greater cash flow provides the powerful CFO with more opportunities to invest in innovation, producing greater outcomes and achieving higher innovation efficiency. On top of that, abundant financial slack motivates powerful CFOs to explore more internal innovation strategies. Nevertheless, the link between a powerful CFO and innovation performance is weakened when there is a conflict of power between CFO and CEO. The second core chapter examines the association between CEO compensation and innovation performance and the implications of government’s regulations on the link in US pharmaceutical-listed firms from 1998 to 2018. The findings advocate that a CEO with high compensation is associated with greater R&D
investment and technology acquisition, and prefers internal innovation strategy over purchasing external technology. However, a highly paid CEO is linked with less expenditure both in R&D and technology purchasing in the event of the government introducing or amending the industry’s regulations. Any introduction or amendment of the industry’s regulations also causes the CEO to prefer acquiring external technology over investing in internal innovation strategies. The third core chapter explores the relationship between political affiliation and innovation input intensity and the impact of board diversity on the association in the Malaysian palm oil industry from 2008 to 2018. The findings suggest that firms with political affiliation are associated with lower innovation input intensity, thus, refutes the assumption of engaging politically connected directors are beneficial for industry that is closely related to the national policies. However, the presence of more female directors on board has brought a positive impact on the link. This denotes greater gender diversity is able to align the interests of politically affiliated directors with firms' innovation agenda.
... We expect that executive ownership and high-quality corporate governance can reduce the agency costs caused by the conflict between controlling shareholders and minority shareholders, and thus mitigate the positive impact of foreign residency rights on executive excess compensation. Executives' incentives tend to align better with those of minority shareholders when they own shares, based on the previous literature on executive equity and compensation (Lambert et al. 1993;Core 2000). For example, Allen (1981) finds that the level of CEO compensation is a decreasing function of the equity held by the CEO (and his family). ...
This study is interested in the effect of controlling persons’ foreign residency rights for executive compensation. Based on a manually collected dataset of Chinese private listed firms from 2004 to 2018, we document that executives in firms with controlling persons with foreign residency rights receive higher excess compensation. These findings provide suggestive evidence consistent with the hypothesis that controlling persons with foreign residency rights design executive remuneration to obtain executives’ cooperation to take advantage of the lower probability of getting caught and punished for self-dealing behaviour. Consistent with this view, we find that the association between foreign residency rights and executive excess compensation is moderated by extradition agreements between destination countries/regions and China, executive ownership, and corporate governance mechanisms.
... Ideally, an effective CEO compensation arrangement could certainly have a positive effect on firm performance (Akter, Ali, Abedin, & Hossain, 2020). Some empirical studies found a negative association between CEO shareownership and compensation (Core et al., 1999;Lambert & Larcker, 1993). The findings of the study conducted by Bin, Chen, and Xuan Ngo (2020) revealed a positive association between Chinese CEO pay and firm performance in measures such as return on assets and stock price return. ...
Previous studies have examined the effect of the chief executive officer’s (CEO) share-ownership and compensation on firm performance (Elsayed & Elbardan, 2018; Hill, Lopez, & Reitenga, 2016; Vemala, Nguyen, Nguyen, & Kommasani, 2014), however, the interaction effect of board of directors (BOD) share-ownership and compensation on firm performance are still unclear. Further, the incentive of higher financial performance to attract members of the BOD to hold shares in the company is still not adequately investigated by the literature. This study, therefore, aims to fill these gaps. Based on an investigation of 56 company-year observations of the Saudi energy industry for the period 2005–2019, we found that BOD share-ownership has a significant direct and positive effect on BOD compensation as well as on the return on equity (ROE). Moreover, the results indicate that BOD compensation affects the ROE significantly, and partially mediates the relationship between BOD share-ownership and ROE. Finally, the study revealed that the ROE positively and significantly affects BOD share-ownership, indicating that the higher the ROE, the more incentive for BOD members to hold shares in the company. The study provides new insights into the extant literature related to the joint effect of BOD share-ownership and compensation on firm performance, as well as the reverse relationship between BOD share-ownership and firm performance.
... Because of their managerial power, executives can shape the organization with their values. Thereby, managerial power describes the ability of managers to exert their will in implementing the strategic choices of their organizations (Carpenter et al., 2004;Finkelstein, 1992;Hambrick, 2007;Lambert et al., 1993). ...
This doctoral thesis deals with the topic of organizational misconduct and covers the three salient research streams in this area by addressing its performance outcomes, antecedents, and preventive measures. Specifically, it is concerned with the question of how different forms of misconduct are reflected in the stock performance of related organizations, thereby, covering the three pillars of corporate sustainability environmental, social, and governance (ESG). Furthermore, it aims to conceptualize how individual cognitive biases may lead to misconduct, therefore, potentially representing an antecedent and how existing management control systems can be enhanced to effectively address specific forms of misconduct, respectively.
To these ends, I first review the research stream of stock price reactions to environmental pollution events in terms of the underlying research samples, methodological specifications, and theoretical underpinnings. Based on the findings of the systematic literature review (SLR), I perform three stock-based event studies of the Volkswagen diesel emissions scandal (Dieselgate), workplace sexual harassment (#MeToo accusations), and the 2003 blackout in the US to cove the three ESG dimensions, respectively. In line with the SLR, my event studies reveal substantial stock losses to firms involved in misconduct that are eventually even accompanied by a spillover effect to uninvolved bystanders.
Then, I review the extant literature conceptually to develop a framework outlining how moral licensing as an individual cognitive bias might lead to a self-attribution of corporate sustainability, a consecutive accumulation of moral credit, and a later exchange of this credit by engaging in misconduct afterward.
Finally, I assess existing workplace sexual harassment management controls, such as awareness training and grievance procedures critically in another conceptual analysis. Based on the shortcomings stemming from management controls’ focus on compliance and negligence of moral duties, I introduce five specific nudges firms should consider to enhance their existing management controls and eventually prevent occurrences of workplace sexual harassment.
Based on the six distinct articles within this doctoral thesis, I outline its limitations and point at directions for future research. These mainly address providing further evidence on the long-term performance effects of organizational misconduct, enriching our knowledge on further cognitive biases eventually leading to misconduct, and conceptualizing nudging beyond the use-case of workplace sexual harassment.
... The incentive of high ED pay fosters competition and effort (Connelly et al. 2014;Kepes, Delery, and Gupta 2009) and can attract potential recruits to join the tournament (Bloom and Michel 2002;Carpenter and Sanders 2004;Conyon, Peck, and Sadler 2001;Park 2017;Siegel and Hambrick 2005;Wang, Zhao, and Thornhill 2015). This should result in greater work effort and a higher commitment to organizational goals (Becker and Huselid 1992), as individuals strive to reach higher or top-level positions (Henderson and Fredrickson 2001;Lambert, Larcker, and Weigelt 1993). ...
(Postprint version available: https://osf.io/k7mta) This study introduces vertical pay dispersion, a prevailing equity issue in discussions of organizations and society, to public management research. Bridging tournament and equity theory with the publicness debate, the study analyses the role of publicness dimensions —ownership, funding, and control— for manager-to-worker pay ratios of state-owned enterprises (SOEs). The results show that, for a unique five-year data set, ownership publicness partly affects vertical pay dispersion, and the effects are moderated by city and SOE size. The study enhances the understanding of vertical pay dispersion in the public sector and offers a research agenda regarding the determinants.
... Regarding the ownership structure and its effect on CEO compensation, Lambert and Larcker (1993) indicated that when managers have a higher share of the ownership stake, CEO compensation is lower. Supporting this view, Core et al. (1999) found that CEO compensation is lower in the case of insider ownership of stock value. ...
The current study examines the effect of ownership structure (i.e., government ownership, family ownership, and foreign ownership) on chief executive officer (CEO) compensation in an emerging market, by considering Jordan as a case study. By using a sample of 136 non financial firms listed on the Amman Stock Exchange over the period of 2015–2019, we find that family ownership has a positive and significant impact on CEO compensation. The finding regarding foreign ownership is contrary to expectations, with a higher foreign ownership reflecting a higher CEO compensation. Overall, these results imply that the ownership structure of Jordanian companies exerts a significant influence on the CEO pay setting process. However, government ownership has no relationship with CEO compensation. This indicates that government ownership is ineffective in determining CEO compensation. We further find that firm size is positively related to CEO compensation, indicating that larger companies have more ability to generate high internal funding, and can afford to pay higher compensation to quality managerial talent. In contrast, the effects of firm age and liquidity are not at significant levels.
... The detailed definitions of these variables are included in Table 11 in Appendix 1. Indi shows industry fixed effects based on Fama-French 48-industry classifications, and Y t captures year fixed effects. We include firm size (SIZE) as a control variable because prior studies document that high tournament incentives are present in large firms (Kale et al., 2009;Lambert et al., 1993;Murphy, 1999). If a CEO is the only director in the board from the executives (CEODIR), pay gap between a CEO and non-CEO executives is expected to increase. ...
We examine whether and how firm-level promotion tournament incentives for executives, measured by the pay gap between a chief executive officer (CEO) and non-CEO executives, vary in different corporate life-cycle stages. Results show that managerial tournament incentives are higher in growth and mature life-cycle stages than in introduction and decline stages. In additional analyses, we find that firms design compensation contracts for growth and mature life-cycle stages with a target to increase tournament incentives for non-CEO executives that induce managerial risk-taking behaviour, leading to high productivity and performance.
JEL Classification: G30, M12
CEO power has been extensively studied across various disciplines and country contexts. Despite the exponential growth of research, there has been limited effort to integrate the vast body of literature. Using bibliometric and other analytical techniques we apply to the 580 articles in our review, we identify and discuss the topics and major research streams considered in CEO power research and their evolution over the years. We also highlight several shortcomings in the existing literature, including four pressing challenges concerning unclear conceptualizations, varied measurement and methods, the under-contextualized nature of CEO power across international contexts, and a lack of attention to how the changing corporate governance landscape has affected CEO power. We provide a roadmap for future scholarship by offering suggestions for addressing these pressing challenges. Finally, we provide several new and promising research directions in our discussion.
Nella letteratura sui meccanismi di incentivazione per i manager si rileva una mancanza di consenso in merito al ruolo svolto dalle stock option. Talvolta si richiama la finalità di allineamento degli interessi divergenti di shareholders e manager, talaltra il rischio di espropriazione degli azionisti di minoranza da parte degli azionisti di controllo. Un campo d'indagine solo parzialmente esplorato è quello relativo alla diffusione delle stock option nelle imprese con proprietà concentrata. Il presente studio si propone, pertanto, di offrire un contributo alla teoria ed alla pratica andando ad indagare la relazione esistente tra la presenza di un soggetto controllante ed il ricorso ai piani di incentivazione azionaria in Italia.
As a crucial component of internal corporate governance, remuneration controls possess the potential to influence the cash holdings of firms. However, identifying the causal relationship between these controls and such holdings presents a considerable challenge. To address this research gap, this paper leverages the implementation of China's Guidance on Further Regulating the Remuneration Management of Heads of Central Enterprises as a quasi-natural experiment to investigate the relationship between executive remuneration controls and firms' cash holdings, utilizing a double-difference approach. Based on an analysis of a sample of listed companies from 2007-2012, the results indicate that firms subject to regulated executive compensation exhibit lower cash holdings. To ensure the robustness of these findings, various statistical techniques such as parallel trend tests, variable replacement, propensity score matching, and placebo tests were employed. Additionally, a mechanism test was conducted, whereby the mediating effect of executive compensation controls on firms' cash holdings was examined, revealing a reduction in internal agency costs. Finally, the analysis of heterogeneity demonstrated that the impact of executive compensation controls on firms' cash holdings was more pronounced in companies with high-quality internal controls, stronger management oversight, and lower information asymmetry.
Purpose
The aim of the paper is to explore within-firm vertical pay inequality and its relation to firm size and firm performance.
Design/methodology/approach
Using firm-level microdata for Kazakhstan, the authors measure within-firm pay inequality as the wage differential between the top- and the bottom-level job occupations. The authors carry out their analysis based on panel regression models.
Findings
The authors find that within-firm pay inequality increases as firms grow. Further, they identify that this trend is mainly driven by top-occupation workers receiving more significant wage increases compared to lower-level workers as firms expand. Once the authors address concerns about endogeneity, they find that pay inequality is negatively associated with firm performance.
Practical implications
Developing strategies and policies that prioritize fairness and transparency in compensation practices is crucial during the expansion process of firms. By actively discouraging rent-seeking behavior, firms can create a work environment that promotes productivity and sustainability, ultimately leading to improved firm performance. The research findings highlight the importance of implementing context-specific interventions, recognizing that different environments may require tailored approaches to address pay inequality effectively.
Originality/value
This study contributes to the study of within-firm pay inequality, firm size and performance in an emerging economy, an area that has been largely overlooked in previous empirical research. The contrasting findings show the importance of the structural and industrial characteristics of emerging markets that contribute to broader and deeper impact of pay inequality compared to developed economies.
We consider the impact of tournament incentives on firm performance. To proxy high-powered tournament incentives, we construct a CEO pay gap as the difference in pay between the highest-earning executive and other officers. Our robust empirical evidence unambiguously demonstrates that high-powered tournament incentives lead to higher levels of firm profitability after controlling for the level of pay and other executive and firm-level characteristics. This result can inform the design of firms’ compensation policy and we recommend firms use vertical pay practices to motivate effort and realise firms’ organisational goals. We fail to support the opposing conjecture that large pay gaps could fuel tensions among executives that could retard firm performance.KeywordsBanksCompensationPay gapTournamentsPerformanceExecutive directors
Purpose
This study investigates the relationship between outside directors, managerial compensation, and firm performance in the Korean insurance industry.
Design/methodology/approach
The authors employ a simultaneous equation framework by using three-stage least squares (3SLS) to address the endogeneity problems that could result from the joint determination of outside directors, firm performance, and executive compensation in Korean insurance companies.
Findings
The authors find that the ratio of outside directors on the board is negatively associated with insurance firm's value and financial profitability. In addition, this study's evidence shows that greater representation on the board by outside directors leads to a higher level of executive pay. In particular, the authors provide evidence that variable compensation scheme and outside directors who have backgrounds in the legal profession and former high-ranking government officials drive this study's main results.
Originality/value
This study adds to the literature by first demonstrating the interaction effects between outside directors, firm performance, and executive compensation in the Korean insurance industry. Unlike previous studies that typically focus on US companies, the authors study the Korean insurance sector that is an emerging power in the global insurance market, ranking seventh in terms of total premium volume, and show that the Korean insurance firm's outside directors system does not work in the manner that it is intended to function.
This paper studies whether the corporate governance of the parent company affects the executive compensation contract of its listed subsidiaries. Based on a quasi-natural experiment on the board reforms in the Chinese central state-owned enterprises (CSOEs), which improves the corporate governance in the ultimate parent company, we find the following: (1) The improved corporate governance of the parent company can effectively restrain the managerial power of listed subsidiaries and reduce excess managerial pay. (2) The above-documented effect is more pronounced when cash flow rights (the wedge between control rights and cash flow rights) of the ultimate parent company is low (high), or when the listed company is at the bottom of the pyramid, or when the managerial power of the subsidiary firm is higher. (3) The improved corporate governance of the parent company can also effectively alleviate managerial perk consumption and the executive–employee compensation gap at their listed subsidiaries. This study suggests that the governance improvement in ultimate parents has a spillover effect in that it enhances the governance at their listed subsidiaries.
We provide a conceptual framework for analyzing studies on management controls and management control systems (MCSs). This framework describes and analyzes the directing and activating processes of management controls and MCSs. Because our focus is on why management controls are effective, our conceptual framework complements earlier frameworks that focus on specific empirical methods, controls, and literature maps. We discuss several applications of the framework, such as depicting an individual research study, comparing multiple research studies examining the same control, and organizing an area of research. Our approach benefits consumers of management accounting research by increasing understanding and access to extant research. In addition, the application of our approach can reveal gaps in the literature or the potential for mediating factors to explain conflicting findings and can thus inform future research.
This study uses Taiwan stock market-listed company data to analyze relationships between managerial compensation, corporate risk, and operating efficiency. This study focuses on three aspects. First, we examined how different types of corporate risk can relate differently to top manager salaries. Second, we investigated whether management efficiency is associated with managerial compensation in Taiwan. Last, we explored how firm size moderates the relationships between top-manager salaries, corporate risk, and operating efficiency. Our findings reveal that credit risk is remarkably different from other risks related to managerial compensation. Moreover, the moderating effect of firm size varies across various factors. Furthermore, most estimated results supported all our hypotheses. We provided subsequent explanations for the outcomes. The particular phenomenon found in this study also gave implications for the contract design of managerial compensation.
We examine the relation between executive equity compensation and corporate disclosure. Specifically, we propose that options and stock awards provide executives with distinct incentives to disclose forecasts to market participants. Since options are risker than stock awards, executives receiving more options will have greater incentives to guide investors and influence the stock price to maximize their compensation payout. We find that a greater proportion of options in executive equity compensation is associated with a greater likelihood to issue earnings forecasts as well as with greater frequency. Overall, these results suggest that options provide executives with stronger incentives than stock awards to mitigate the disclosure agency problem.
Good corporate governance underpins good corporate social responsibility (CSR) through value-creating stakeholder relationships. When properly composed and compensated, the board of directors, an important corporate governance mechanism, plays an efficient monitoring role, reducing agency cost. Exploring board connections and remuneration of the top 100 listed firms in the Stock Exchange of Thailand as a case study, we find evidence supporting agency cost of board connections such that politically connected board members are paid higher. However, politically connected board members play an effective monitoring role in setting top management pay, supporting stewardship and resource dependency theories. Our case study highlights the importance of balancing boards of directors' compositions and remunerations to achieve CSR outcomes and value creation among stakeholders.
We argue that relative performance evaluation (RPE) contracts introduce a tournament among the focal firm and peer firms. We test whether a firm’s riskiness is altered by its CEO’s incentive to win the tournament. We find that a firm that performed poorly relative to its peers during an interim period takes more risk in the remainder of the evaluation period than a firm with better interim performance. This effect is stronger when the interim assessment date is closer to the end of the evaluation period and when winning the competition is more important to the CEO. Together, our results suggest that RPE contracts create tournament incentives for CEOs and significantly affect corporate risk taking.
The study investigates the effect of tournament incentives on corporate social responsibility (CSR). Using data from Chinese listed firms during the period from 2010 to 2019, we find that tournament incentives can encourage corporate executives to improve their CSR performance. The results also reveal that this positive association between tournament incentives and CSR is more pronounced in firms that have a tradition of recruiting a successor CEO from within the organization. However, in companies with CEOs recruited internally, shareholder monitoring can restrain the tournament effect on CSR. In addition, we also find that tournament incentives are more pronounced in State Owned Enterprises. The results remain robust to a batch of endogeneity tests to address potential self-selection bias and reverse causality between tournament incentives and CSR.
This paper reviews the literature on the quality of corporate governance practices in the oil and gas exporting developing countries (Russia, Venezuela, Nigeria, the MENA, and the GCC countries). We investigate if the internal and external governance mechanisms function efficiently in these countries. The findings of the reviewed literature show that the quality of corporate governance practices in the countries of our focus is not efficient at internal and external levels. Regarding the internal mechanisms, weak governance mechanisms originate from low transparency levels and give rise to poor voluntary disclosure in the firms. However, some internal mechanisms are more efficient in some of these countries as presented in the conclusion section. Regarding the inefficiency of external mechanisms, all the studied countries share common characteristics with respect to weak legal systems, inefficient law enforcement infrastructures, and low levels of protection for properties, investors, and shareholders especially the minority ones
We compare acquiring firms’ CEO pay with that of the highest‐paid non‐CEO director and investigate the influence of CEO pay disparity on takeover premiums and bidder performance. Based on a takeover sample of Australian listed targets and bidders during the 2002–2015 period, we find that takeover premiums are significantly higher if the deals are processed by acquiring firms with higher CEO pay disparity. Although these firms do not receive favourable immediate market responses to their takeover announcements, they outperform in the long run. We find no evidence that offering a large takeover premium harms shareholders’ wealth. Overall, our findings largely support efficient contracting theory in the Australian M&A context.
Prior empirical research investigating the relationship between chief executive officer (CEO) tenure and firms’ financial performance has shown inconclusive results. Based on arguments of agency and behavioral agency theories, we suggest that this relationship is nuanced and may vary depending on CEO pay and board monitoring. In response to these arguments, we meta-analytically test 385 studies ( n = 1,029,602). We find that CEO tenure is positively related to firms’ financial performance. This positive relationship is enhanced when CEOs receive higher cash compensation or hold more stock ownership. On the other hand, the above positive relationship becomes weaker when CEOs receive higher long-term incentives or when the firm has more independent board directors. These findings suggest that CEO pay and board monitoring, or agency mechanisms in general, can offer new research avenues to help explore boundary conditions of the CEO tenure and firms’ financial performance relationship.
Purpose
This study aims to examine whether compensation committees dominated by co-opted directors are less effective in mitigating the CEO horizon problem.
Design/methodology/approach
The author uses a sample of 7,280 firm-year observations from 1998 to 2011.
Findings
In this study, the author finds evidence of opportunistic research and development (R&D) reduction and accruals management in firms with retiring CEOs and compensation committees dominated by co-opted directors. Moreover, it is found that R&D reduction and income-increasing accruals are less discouraged when determining the compensation for retiring CEOs by compensation committees that are dominated by co-opted directors. The results suggest that compensation committees dominated by co-opted directors are less effective in adjusting CEO compensation to mitigate the CEO horizon problem.
Originality/value
The study reveals that co-opted directors are weak monitors. Moreover, the study adds empirical evidence to the debate of organizations’ CEO horizon problem. Finally, the study adds to the literature on corporate governance, revealing that compensation committees play an important role in mitigating an organization’s CEO horizon problem by adjusting CEO compensation.
This study explores ways in which salary can be structured to reduce leadership shortages by investigating how comparative wage dispersion and position alter the relationship of salary to principal turnover. Using a seventeen-year longitudinal dataset covering over sixteen thousand principals in Texas, discrete-time hazard models demonstrate that principals are highly sensitive to salary comparisons over and above basic salary. Higher comparative position is associated with significantly reduced turnover risk, while wider dispersion is associated with a significantly increased turnover risk. Interactions demonstrate that dispersion and position act in tandem to create conditions where principals have particularly high turnover risk. These results have implications for strategies to address turnover through district salary structures, as well as broader notions of how wage tournaments operate in the principal labor market.
This study introduces a new dimension, age diversity of non-CEO executives, which moderates the relationship between promotion-based tournament incentives, measured as the pay gap between the CEO and non-CEO executives, and firm performance. For a sample of Chinese listed firms from 2005 to 2015, we find that the tournament incentives for non-CEO executives relate positively to firm performance. This relationship is weaker when non-CEO executives are from different age cohorts, whereas the tournament effect is enhanced when non-CEO executives are from the same age cohort. The negative moderation effect of age diversity is more pronounced in state firms and in the Northern China Plain cultural region. The negative moderation effect disappears in firms with CEOs who have overseas experience. We reason that the peer pressure among the similar-aged non-CEO executives enhances the tournament competition and that age hierarchy reduces incentives for younger executives to compete. Our findings have important implications for firms not only in China, but also in countries and regions where seniority is highly valued when setting executive compensation and optimizing organizational structure.
Using executive resume data of China’s listed companies between 2006 and 2016, we investigated the relationship between pay disparities within top management teams (TMT) and firms’ innovation performance. Specifically, we assessed two dimensions of pay disparities: vertical pay disparity between CEOs and non-CEO managers, and horizontal pay disparity among non-CEO managers. Considering the difference in regional marketization progress, we also explored the moderating effect of marketization degree on this relation. It is found that: with vertical pay disparity increasing by 1%, firms’ innovation performance is improved by 2.3%; with horizontal pay disparity increasing, firms’ innovation performance is promoted first and then restrained; higher marketization degree strengthens the incentive effects of both vertical and horizontal pay disparity. But the grouped regression results show that, in state-owned enterprises, horizontal pay disparity is only negatively associated with innovation. The theoretical and practical significance of the research is discussed at the end of the paper.
This paper presents a real-options model of entrenchment in which a CEO chooses how much effort to put into boosting a firm’s productivity and the board and CEO bargain over executive-compensation and investment policies. The surplus that bargaining allocates derives from the reduction in value of the firm’s capital that occurs if the CEO is replaced. Even if the CEO has no ownership stake, she exerts effort in order to increase the value of the capital at risk. This increases the shared surplus, which increases the CEO’s current pay. Newly appointed CEOs are paid less and work harder than their entrenched counterparts. They exert more effort at firms where the CEO’s human capital is more important. In contrast, entrenched CEOs exert more effort at firms where their human capital is less important and turnover-induced disruption has a higher cost. Both types work harder when average productivity growth is higher and productivity growth is more sensitive to effort. The board and CEO will agree to accept a degree of investment inefficiency if this allows them to slow down the CEO’s entrenchment.
Past research rooted in the Behavioral Theory of the Firm has extensively examined the impact of performance feedback on organizational change and risk taking, finding robust effects that performance shortfalls enhance the risk taking of firms. We argue that the strength of this effect is likely to be contingent on the attributes of the firm’s top management team. To enhance our understanding of which firms are more likely to be sensitive to performance cues, we draw on the Upper Echelon Theory to theorize that key structural attributes of the top management team—tenure and gender diversity, size, and pay disparity—affect how top executives interpret poor performance and act upon it through engagement in strategic risk taking. Results show that top management teams with greater tenure diversity, smaller size, and smaller pay disparity among members engage in more strategic risk taking following performance shortfalls.
Prior studies on chief executive officer (CEO) compensation focus mainly on large firms. This paper aims to suggest new factors associated with CEO compensation for small, homogeneous firms, specifically, Australian early‐stage mining exploration entities (MEEs). We document a set of predictors of CEO compensation proxying for economic performance, including geological prospectivity components of the exploration and evaluation asset account and proceeds from equity raisings which enhances survival probabilities. We find positive associations between these predictors and CEO remuneration. In terms of CEO pay mix, we find that exploration and evaluation asset acquisitions and equity proceeds are both positively associated with the proportion of option value in CEO total compensation. This suggests MEEs allocate their cash resources to investment opportunities, rather than CEO compensation. Overall, these findings, coupled with a significant and positive pay‐performance relation, provide evidence supporting efficient compensation practices in the MEE context.
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This paper investigates whether decision makers are forward looking in dynamic strategic interactions and incorporate variations of continuation values in their choices. Using data from professional and semi-professional basketball tournaments, we find that the expected relative strength of a team in future interactions indeed affects behavior in the present. The results also show that the response to changes in the continuation value is stronger if the structure of prizes is convex across stages, if the players are in a decisive game and if the prevalence of free riding within a team is low.
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