A selection of interesting research and articles we found recently on executive compensation issues.
Do CEO incentives drive corporate social responsibility (CSR)?
Yes, according to Michele Fabrizi, Christine Mallin and Giovanna Michelon. These researchers explored the role of CEO incentives on CSR. Incentives were monetary (based on both bonus compensation and changes in the value of the CEO’s portfolio of stocks and options) and non-monetary (career concerns, incoming/departing CEOs, and power and entrenchment).
In 597 US firms studied over 2005–2009, both monetary and non-monetary incentives affected CSR decisions. Interestingly, monetary incentives designed to align the CEO’s and shareholders’ interests had a negative effect on CSR, and non-monetary incentives had a positive effect on CSR. The study has implications for designing executive remuneration (compensation) plans.
For more details read the full paper at: Michele Fabrizi, Christine Mallin and Giovanna Michelon. 2014. The Role of CEO’s Personal Incentives in Driving Corporate Social Responsibility.
Journal of Business Ethics, 124(2), 311-326.
How executive compensation can destroy values
Knut Ims, Lars Pedersen and Laszlo Zsolnai asked whether increasing levels of executive compensation can be justified from an ethical point of view, especially after the global financial crisis. These authors explore the social, ecological and existential costs of economic incentives, by discussing how relying on increasing levels of executive compensation may have an adverse effect on overall managerial performance. They argue that one-dimensional economic incentives may destroy existential, social, and systemic values that influence the manager’s commitment to ensure responsible business conduct, and have negative spillover effects that may reduce the manager’s performance.
This is consistent with well-established findings that reliance on sources of extrinsic motivation (such as economic incentives) may displace intrinsic motivation. Taking a holistic perspective, the authors explore the influence of sources of extrinsic motivation on the manager’s intrinsic commitment to different types of values. They consider how it may influence the manager’s ethical reflection and behaviour or lack thereof.
For more on this topic, read the paper: Knut J. Ims, Lars Jacob Tynes Pedersen and Laszlo Zsolnai. 2014. How Economic Incentives May Destroy Social, Ecological and Existential Values: The Case of Executive Compensation.
Journal of Business Ethics, 123(2), 353-360.
Does pay-for-performance work?
It works more than we thought, according to researchers Anthony Nyberg, Jenna Pieper and Charlie Trevor. These authors take a nuanced perspective by integrating fundamental principles of economics and psychology to identify and incorporate employee characteristics, job characteristics, pay system characteristics, and pay system experience into a contingency model of the pay-for-performance–future performance relationship. Studying 11,939 employees over a 5-year period, they found that merit and bonus pay, as well as their multiyear trends, are positively associated with future employee performance. Furthermore, contrary to what traditional economic perspectives would predict, bonus pay may have a stronger effect on future performance than merit pay.
The results also support a contingency approach to pay-for-performance’s impact on future employee performance, since merit pay and bonus pay can substitute for each other. Furthermore, the strength of pay-for-performance’s effect depends on employee tenure, the pay-for-performance trend over time, and job type.
For more information, read the paper at: Anthony J. Nyberg, Jenna R. Pieper, and Charlie O. Trevor. 2013. Pay-for-Performance’s Effect on Future Employee Performance: Integrating Psychological and Economic Principles Toward a Contingency Perspective.
Journal of Management, December 19, 2013.
Available at: http://jom.sagepub.com/cgi/content/abstract/0149206313515520v1
The determinants of CEO compensation: A meta-analysis
Although there are many studies about the determinants of CEO compensation, the balance of evidence for one of the more controversial theoretical approaches, managerial power theory, remains inconclusive. Marc van Essen and his team provide a meta-analysis of 219 US-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.
Read further details in van Essen, Marc, Otten, Jordan and Carberry, Edward J. 2015. Assessing Managerial Power Theory: A Meta-Analytic Approach to Understanding the Determinants of CEO Compensation.
Journal of Management, 41 (1), 164-202.
Firm performance and founder/family owners’ impact on pay dispersion among top managers.
Peter Jaskiewicz and his team note that emerging evidence suggests that pay dispersion among non-CEO top management team (TMT) members harms firm performance. This in turn raises questions about why firms’ owners tolerate or even support pay dispersion. Prior research shows that the key distinction between founder and family owners is that in addition to firm performance and growth goals, family owners pursue socio-emotional goals. On the basis of this distinction, the authors develop and test theory linking founders’ and families’ ownership to TMT pay dispersion.
A Bayesian panel analysis of Standard & Poor’s 500 firms shows that founder/owners use less TMT pay dispersion and that family owners, relative to founder owners, use more, although that declines across generations. Evidence is also provided that that TMT pay dispersion harms firm performance. The theory and results are significant because they help to explain why some owners favour compensation practices that cause TMT pay dispersion, despite evidence that this harms firm performance.
Further details are in: Peter Jaskiewicz, Joern H. Block, Danny Miller, and James G. Combs. 2014. Founder Versus Family Owners’ Impact on Pay Dispersion Among Non-CEO Top Managers: Implications for Firm Performance.
Journal of Management, 0149206314558487, first published on November 17, 2014 as doi:10.1177/0149206314558487