Managerial discretion and
Runtian Jing, Yuanyuan Wan and Xia Gao
University of Electronic Science and Technology of China,
Chengdu, People’s Republic of China
Purpose – The purpose of this paper is to identify the reasons for the differences of executives’
compensation across industries from the managerial discretion perspective.
Design/methodology/approach – Based on the data from 37 manufacturing industries from 2002
to 2007 in China, managerial discretion for each industry is calculated regarding to the conception
raised by Hambrick and Finkelstein which is further clustered into three groups. Then, regression
model is used to testify the relation between managerial discretion and executives’ compensation.
Findings – The executives’ compensation is positively related to managerial discretion that is
determined by the industrial environment. In the faster growing or higher competing industries, the
executives tend to have more managerial discretion, thus they will be better paid due to the extensive
latitude of their decision making.
Research limitations/implications – To a certain extent, managerial discretion can be taken to
measure the uncertainty or marginal productivity of the executives’ work. From the industrial
perspective, there are actually some factors far beyond the control of executives but inﬂuencing their
Practical implications – When designing the compensation system for the executives, the
industrial factors surely should be taken into consideration, to work out a fair and competitive
Originality/value – The paper proves a very important point in the issue of the decisive factors for
executives’ compensation. Managerial discretion raises the uncertainty and complexity to executives’
work, thus it determines the compensation.
Keywords China, Remuneration, Senior management
Paper type Research paper
Hambrick and Finkelstein (1987) introduced and elaborated the concept of managerial
discretion. They deﬁned managerial discretion as executives’ latitude of action and argued
that the latitude is formed during the multiple process of a repeated game about their
rational action between the executives and the inﬂuencing group of the ﬁrm. Executives’
action is determined by three setsof factors: the task environment, the internal structure of
organization and the executive himself or herself. Thus, managerial discretion is shown
as a synthetic outcome of the complicated process. Hambrick and Finkelstein created
this concept in order to balance the divaricating between the theory of strategic choice
and the theory of organizational ecology, about if the organization can determine or
dominate its own development. The strategic choice theory believes that organization is
guided by strategy and can develop with its own willing, and it emphasis on organization’s
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Funds for this study are provided by the Natural Science Foundation of China (NSFC, 70872017)
and the Program for New Century Excellent Talents in University (NCET-06-0804).
Journal of Chinese Human Resource
Vol. 1 No. 1, 2010
q Emerald Group Publishing Limited