Who gets the carrot and who gets the stick? Evidence of gender disparities in executive remuneration

This paper offers a new explanation of the gender pay gap in leadership positions by examining the relationship between managerial bonuses and company performance. Drawing on findings of gender studies, agency theory, and the leadership literature, we argue that the gender pay gap is a context‐specific phenomenon that results partly from the fact that company performance has a moderating impact on pay inequalities. Employing a matched sample of 192 female and male executive directors of U.K.‐listed firms, we corroborate the existence of the gender pay disparities in corporate boardrooms. In line with our theoretical predictions, we find that bonuses awarded to men are not only larger than those allocated to women, but also that managerial compensation of male executive directors is much more performance‐sensitive than that of female executives. The contribution of attributional and expectancy‐related dynamics to these patterns is highlighted in line with previous work on gender stereotypes and implicit leadership theories such as the romance of leadership. Gender differences in risk taking and confidence are also considered as potential explanations for the observed pay disparities. The implications of organizations' indifference to women's performance are examined in relation to issues surrounding the recognition and retention of female talent. Copyright © 2010 John Wiley & Sons, Ltd.     

Leveraging foreign institutional logic in the adoption of stock option pay among Japanese firms

Research summary : We investigate why Japanese firms have adopted executive stock option pay, which was developed with shareholder‐oriented institutional logic that was inconsistent with Japanese stakeholder‐oriented institutional logic. We argue that Japanese managers have self‐serving incentives to leverage stock ownership of foreign investors and their associated institutional logic to legitimize the adoption of stock option pay. Our empirical analyses with a large sample of Japanese firms between 1997 and 2007 show that when managers have elite education, high pay inequality with ordinary employees, and when firms experience poor sales growth, foreign ownership is more likely associated with the adoption of stock option pay. The study shows the active role of managers in facilitating the diffusion of a new governance practice embodying new institutional logic. Managerial summary : Why have Japanese firms adopted stock option pay for executives? Inconsistent with Japanese stakeholder‐oriented tradition in corporate governance, such pay has been believed to prioritize managerial attention to the interests of shareholders over those of other stakeholders. However, to the extent that shareholders' interests are legitimate in the Japanese context, executives who have self‐serving incentives to adopt such pay can leverage the need to look after shareholders' interest in their firms to legitimize their decisions. In a large sample of Japanese firms, we find that foreign ownership (representing shareholders' interests) is more likely to be associated with the adoption of stock option pay when managers are motivated to receive such pay, such as when they have elite education, high pay inequality with ordinary employees, or poor sales growth. Copyright © 2015 John Wiley & Sons, Ltd.     

An Explanation of Top Executive Pay: A UK Study

This study extends prior research by separating executive remuneration into salary and annual bonus for the purpose of empirically verifying their determinants. A model is introduced to estimate the extent to which pay and its determinants are related. Based on a net sample of 90 large UK firms, salary was found to be strongly related to firm size, as opposed to annual bonus, which was modestly associated with both firm performance and size. An important discovery was that salary showed no relationship to a firm's economic performance. The inability to find any association between salary and performance suggests that each component of pay has a different set of determining factors.     

Opening the Black Box: The Internal Labor Markets of Company X

This paper sets out to analyze an internal data set on a Taiwanese auto dealer employing three distinct types of workers. The effects of jobs and levels are positive on both the salary and bonus equations, albeit smaller under a fixed effects than under OLS; however, when factoring in individual fixed effects, the reductions in the bonus equations are greater than those in the salary equations. With changing economic conditions, any consequent variations are greater in bonuses than in salaries, with the most extreme variations being felt by higher ranking employees than lower-level workers. Promotion premiums between levels are smaller than the average differences in pay, and although wage variations do exist within and between levels, the greater effect is on bonuses rather than salaries. The variations in both salaries and bonuses, defined by the coeffficient variations, are also greater in those years when demand is high, as opposed to years of low demand. Entry and exit behavior is observed at all levels, although it is more likely to occur among the lower levels of the hierarchy. Finally, we present strong evidence in support of the cohort effect. Overall, our findings confirm the prevalence of internal labor market (ILM) theories.     

CEO incentives,innovation, and performance in technology‐intensive firms: a reconciliation of outcome and behavior‐based incentive schemes

Building on the agency view of corporate governance, we propose that technology‐intensive firms use both outcome and behavior‐based performance criteria for rewarding CEOs. Using a sample of 206 firms from 12 U.S. manufacturing industries, we find that as technological intensity increases CEO bonuses are more closely linked to financial results and that total CEO incentives are associated with two indicators of desirable innovation behaviors: invention resonance and science harvesting. Invention resonance refers to the impact a firm's inventions have on other firms' inventions, while science harvesting reflects a firm's commitment to scientific research. As technological intensity increases, aligning bonus with financial results, total incentives with invention resonance, and total incentives with science harvesting predict firm market performance. Copyright © 2006 John Wiley & Sons, Ltd.     

Activist‐impelled divestitures and shareholder value

Research Summary : This study analyzes how the divestitures that are impelled by activist investors in their campaigns against public corporations affect shareholder value. Using hand‐collected data on the activist campaigns that were launched against and the divestitures that were undertaken by Fortune 500 companies between 2007 and 2015, we find that activist‐impelled divestitures are more positively associated with immediate and longer‐term measures of shareholder value than comparable manager‐led divestitures. These performance differences persist for nearly two years after the completion of these deals. Our results empirically test the idea that firms with agency problems unlock shareholder value when they divest, and support the notion that activist investors fulfill an important external governance function. Our work also opens new research opportunities and offers practical implications as well. Managerial Summary : This study investigates how divestitures that are undertaken at the behest of activist investors affect shareholder value. We find that divestitures that were undertaken under pressure from activist investors are associated with more positive shareholder returns than comparable divestitures that were undertaken voluntarily by managers. These performance differences persist for nearly two years after the completion of these deals, alleviating concerns about the purported short‐termism of activist investors. Our findings suggest that activist investors may fulfill an important governance function by inducing managers to undertake strategies that they might not otherwise pursue, thereby unlocking shareholder value.     

Ownership structure and economic performance in the largest european companies

The paper examines the impact of ownership structure on company economic performance in 435 of the largest European companies. Controlling for industry, capital structure and nation effects we find a positive effect of ownership concentration on shareholder value (market‐to‐book value of equity) and profitability (asset returns), but the effect levels off for high ownership shares. Furthermore we propose and support the hypothesis that the identity of large owners—family, bank, institutional investor, government, and other companies—has important implications for corporate strategy and performance. For example, compared to other owner identities, financial investor ownership is found to be associated with higher shareholder value and profitability, but lower sales growth. The effect of ownership concentration is also found to depend on owner identity. Copyright © 2000 John Wiley & Sons, Ltd.     

Don't Forget the Gravy! Are Bonuses Just Added on Top of Salaries?

The press often depicts bonuses as extra payments to the already well compensated and calls for reform. Yet, these calls typically ignore the efficiency argument that bonuses are potentially risky performance pay that substitute for salary compensation. This paper uses representative UK data to estimate that bonuses appear not to substitute for salary in cross‐sectional estimates. Yet, when controlling for time‐invariant characteristics in panel data, bonuses emerge as partial substitutes. Each pound of bonus comes at a cost of 40 pence in other earnings. The degree of substitution is far larger at the bottom of the earnings distribution and far smaller at the top of the earnings distribution where, indeed, bonuses look more like gravy.     

Effectiveness of Individual and Aggregate Compensation Strategies

Based on a sample of 175 scientists and engineers, this study shows that individual-based rewards (either in the form of merit pay or individual bonuses) are perceived as less effective than aggregate incentive strategies for R & D workers. The pay effectiveness measures used here include pay satisfaction, propensity to leave, project performance, and individual performance. All things considered, team-based bonuses are perceived as the most effective rewards in an R & D setting. The findings also indicate that employees with a low willingness to take risks are more likely to experience withdrawal cognition if they work for a firm that relies on variable compensation.     

Chief executive compensation: A study of the intersection of markets and political processes

A model of the determinants of chief executive (CEO) compensation is presented and tested. Based on a sample from the leisure industry, the study finds that CEO pay has complex links to several factors: firm size, complexity, performance, CEO power, board vigilance, and the CEO's human capital. The study includes a separate examination of CEO salary and bonus, as well as a test of pay determination across McEachern's (1975) ownership categories.     

Executive Compensation and Ethnic Minority Status

We examine the compensation of ethnic minority executives in listed U.S. firms. The total pay of African American executives is 9 percent lower than that earned by Caucasians. This is due to lower base salary, lower bonus, and lower restricted stock grants. The lower bonus is due to a lower sensitivity to above‐average firm performance. African Americans also earn significantly less on the exercise of stock options, increasing the pay gap to 17 percent for total ex‐post pay. In contrast to African Americans, the compensation of Hispanic and Asian executives is comparable to Caucasians.     

Politically connected boards and top executive pay in Chinese listed firms

Drawing on social comparison theory, this study examines the relationship between politically connected boards and top executive pay. Moreover, given the socialist orientation of China, tests are also carried out to establish the relationship between politically connected directors and pay dispersion across the firm. We find a negative association between politically connected boards and top executive pay. We also find that politically connected boards are negatively associated with pay dispersion, i.e., the higher the number of political directors on the board the smaller the gap between top executive pay and average employee pay. Finally, our study shows that politically connected directors weaken the pay‐performance link. These findings have important theoretical, policy, and managerial implications. Copyright © 2014 John Wiley & Sons, Ltd.     

Profit sharing bonuses and the cost of debt: Business finance and compensation policy in Japanese electronics firms

Profit sharing bonuses can be thought of as a buffer to protect a firm's uncertain future cash flow. When positive cash flows are threatened, firms can reduce the cost of doing business by reducing the size of bonuses paid to employees. Such an action increases the likelihood that firms will be able to pay fixed debt obligations without the secondary negative consequences of other cost-saving activities, including laying off personnel. Such profit sharing bonus compensation plans shift risk from debt holders to employees. In an efficient capital market, this shift will be reflected in a lower cost of debt. Implications of this argument are tested using a sample of Japanese electronics firms.This research was supported by grants from the Office of Naval Research, the US-Japan Friendship Commission, and the Mellon Foundation. Additional support was provided by IBM, the General Electric Foundation, Amp. Inc., the Westinghouse Electric Corporation, and the Alcoa Foundation. Discussions with William G. Ouchi, Tom Copeland, Nick Benes, William Hesterly, and the Organisation Economics Seminar at UCLA have been valuable in the development of this work.     

ONE HAT TOO MANY: KEY EXECUTIVE PLURALITY AND SHAREHOLDER WEALTH

Tracing backward the career paths of the key executives of Business Week’s 1990 listing of the 1000 most valuable publicly held companies, we empirically examined the impact of announced changes in key executive plurality on stockholder returns. We found the more complete the position consolidation, the more negative were the shareholder responses. To attempt to gain further understanding, the additional variables of executive’s origin, the size of the board of directors of the firm, the proportion of outsiders on the board, and prior firm performance were examined. © 1997 by John Wiley & Sons, Ltd.     

Does a long‐term orientation create value? Evidence from a regression discontinuity

Research summary : In this paper, we theorize and empirically investigate how a long‐term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives' long‐term incentives. Specifically, we examine shareholder proposals on long‐term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long‐term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to (1) an increase in firm value and operating performance—suggesting that a long‐term orientation is beneficial to companies—and (2) an increase in firms' investments in long‐term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time‐based” agency conflict between shareholders and managers. Managerial summary : This paper shows that corporate short‐termism is hampering business success. We show clear, causal evidence that imposing long‐term incentives on executives—in the form of long‐term executive compensation—improves business performance. Long‐term executive compensation includes restricted stocks, restricted stock options, and long‐term incentive plans. Firms that adopted shareholder resolutions on long‐term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. We unpack the reasons for these improvements in performance, and find that firms that adopted these shareholder resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment. Copyright © 2016 John Wiley & Sons, Ltd.     

Top management team incentive heterogeneity,strategic investment behavior,and performance: A contingency theory of incentive alignment

Research summary : We develop and test a contingency theory of the influence of top management team (TMT) performance‐contingent incentives on manager–shareholder interest alignment. Our results support our theory by showing that although TMTs engage in significantly higher levels of acquisition investment when their average incentive levels increase, investors' responses to those large investments are generally negative. More importantly, however, we further find that within‐TMT incentive heterogeneity conditions that effect, such that investors evaluate TMTs' large acquisition investments more positively as the variance in those top managers' incentive values increases. Thus, within‐TMT incentive heterogeneity appears to increase manager–shareholder interest alignment, in the context of large acquisition investments. Managerial summary : We find that as the average value of TMTs' incentives increase, relative to their total pay, they invest more in acquisitions and investors' respond negatively to the announcement of those deals. However, we further show that investors respond more positively to acquisitions announced by TMTs whose members' incentive values vary (some TMT members hold higher incentives and others hold lower). Results imply that when TMT members hold differing incentives levels, they approach investments from divergent perspectives, scrutinize those investments more heavily, and make better decisions, relative to TMTs with similar incentives. They also suggest that boards seeking tighter manager–shareholder interest alignment may benefit from introducing variance into TMT members' incentive structures, as doing so appears to create divergent preferences that can improve team decision making. Copyright © 2016 John Wiley & Sons, Ltd.     

Gender and Piece Rates, Commissions, and Bonuses

Previous work shows that establishments with higher proportions of women are more likely to use piece rates but that individual women are less likely to receive performance pay. We present a model in which lower expected tenure and labor force attachment are positively associated with piece rates but are negatively associated with other forms of performance pay. Analysis of the National Longitudinal Survey of Youth (NLSY) confirms that women are more likely to be paid piece rates and simultaneously less likely to be paid commissions and bonuses.     

Managerial Pay and Governance in American Nonprofits

This article examines the compensation of top managers of nonprofits in the United States using panel data from tax returns of the organizations from 1992 to 1996. Studying managers in nonprofits is particularly interesting given the difficulty in measuring performance. The article examines many areas commonly studied in the executive pay (within for-profit firms) literature. It explores pay differences between for-profit and nonprofit firms,pay variability within and across nonprofit industries, managerial pay and performance (including organization size and fund raising) in nonprofits, the effect of government grants on managerial pay, and the relationship between boards of directors and managerial pay in nonprofits.     

Subnational institutional contingencies and executive pay dispersion

This paper investigates the impact of subnational institutional contingencies on executive pay dispersion structure and the relationship between pay dispersion and firm performance. Using executive compensation data on Chinese listed firms between 2000 and 2011, we find that executive pay dispersion is significantly lower in state-owned enterprises (SOEs), while is significantly higher in cross-listed firms and to a smaller degree in firms located in developed regions. There is also evidence that executive pay dispersion is smaller during the voluntary compensation disclosure period. After controlling for endogeneity of pay determination, we find that executive pay dispersion is positively associated with firm performance. In addition, the positive link between executive pay dispersion and firm performance is stronger in non-SOEs than in SOEs, and stronger in firms located in more developed regions than those not. Our findings are also robust to alternative measures of pay dispersion and firm performance.     

The Legitimacy of Pay and Performance Comparisons: An Analysis of UK University Vice Chancellors Pay Awards

This article examines UK University Vice Chancellors (VC) pay awards. The empirical analysis, covering the period 1997–2002, evaluates the impact upon VC pay awards of university performance measures, internal pay comparisons and two external pay comparisons, that is, the pay of other VCs and the pay of chief executive officers (CEOs) leading comparable‐sized UK firms. For the total sample, we find no evidence that VC pay awards are related to any of the performance measures, although for the pre‐ and post‐1992 subsamples there is some evidence that pay awards are related to some ‘mission‐relevant’ performance measures. All the analyses show a positive relationship between changes in the proportion of other highly paid employees and VC pay awards, which suggests that internal pay comparisons play an important role in remuneration committee decision making. As anticipated, the two external pay benchmarks have very different effects upon VC pay awards; the pay received by other VCs produces a marked ‘mean reversion’ in pay levels while the pay of CEOs running comparable‐sized UK firms had a highly significant positive impact upon VC pay awards. Following the insights of institutional theory, we interpret this conservatism by university remuneration committees as stemming primarily from legitimation concerns rather than financial constraints.