Executive pay dispersion, corporate governance, and firm performance

Executive pay dispersion, corporate governance, and firm performance Much of the research on management compensation focuses on the level and structure of executives’ pay. In this study, we examine a compensation element that has not received so far considerable research attention—the dispersion of compensation across managers—and its impact on firm performance. We examine the implications of two theoretical models dealing with pay dispersion—tournament versus equity fairness. Tournament theory stipulates that a large pay dispersion provides strong incentives to highly qualified managers, leading to higher efforts and improved enterprise performance, while arguments for equity fairness suggest that greater pay dispersion increases envy and dysfunctional behavior among team members, adversely affecting performance. Consistent with tournament theory, we find that firm performance, measured by either Tobin’s Q or stock performance, is positively associated with the dispersion of management compensation. We also document that the positive association between firm performance and pay dispersion is stronger in firms with high agency costs related to managerial discretion. Furthermore, effective corporate governance, especially high board independence, strengthens the positive association between firm performance and pay dispersion. Our findings thus add to the compensation literature a potentially important dimension: managerial pay dispersion. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Executive pay dispersion, corporate governance, and firm performance

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Publisher
Springer Journals
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-007-0053-8
Publisher site
See Article on Publisher Site

Abstract

Much of the research on management compensation focuses on the level and structure of executives’ pay. In this study, we examine a compensation element that has not received so far considerable research attention—the dispersion of compensation across managers—and its impact on firm performance. We examine the implications of two theoretical models dealing with pay dispersion—tournament versus equity fairness. Tournament theory stipulates that a large pay dispersion provides strong incentives to highly qualified managers, leading to higher efforts and improved enterprise performance, while arguments for equity fairness suggest that greater pay dispersion increases envy and dysfunctional behavior among team members, adversely affecting performance. Consistent with tournament theory, we find that firm performance, measured by either Tobin’s Q or stock performance, is positively associated with the dispersion of management compensation. We also document that the positive association between firm performance and pay dispersion is stronger in firms with high agency costs related to managerial discretion. Furthermore, effective corporate governance, especially high board independence, strengthens the positive association between firm performance and pay dispersion. Our findings thus add to the compensation literature a potentially important dimension: managerial pay dispersion.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 2, 2007

References

  • Investment opportunities and the structure of executive compensation
    Baber, W; Janakiraman, S; Kang, S
  • Detecting abnormal operating performance: the empirical power and specification of test statistics
    Barber, B; Lyon, J
  • Executive rank, pay and project selection
    Barron, J; Waddell, G
  • Additional evidence on the association between director stock ownership and incentive compensation
    Chen, CY
  • Corporate governance, chief executive officer compensation and firm performance
    Core, J; Holthausen, R; Larcker, D
  • The relationship between managerial ownership and firm performance in high R&D firms
    Cui, H; Mak, Y
  • The cross-section of expected stock returns
    Fama, E; French, K
  • Large sample properties of generalized method of moments estimators
    Hansen, L

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