Power as a determinant of executive compensation

Most empirical investigations on the disassociation between executive compensation and firm performance have been done using agency theory. Agency theory alludes to a power imbalance favorable to the executives, allowing them to pursue their self-interests in the form of large pay packages. However, because of its roots in the economic discipline, agency theory has led researchers to test financial rather than behavioral hypotheses. Over 70 years of research has been conducted on the pay-form-performance relationship, but only a few significant relationships have been found. This paper attempts to incorporate behavioral conjectures of power into the agency theory framework to provide a comprehensive approach to testing executive pay. Agency theory is combined with the resource dependency theory and with specific measures of power developed by Finkelstein (1992) for a more complete executive pay model.