Adoption and Coverage of Performance‐Related Pay during Institutional Change: An Integration of Institutional and Agency Theories

Abstract

Whether or not to adopt and how extensively to use a newly legitimized practice are discrete decisions made by firms undergoing institutional change. The aim of this paper is to identify the distinct effects of economic, social, and political factors on the adoption of performance-related pay practices and their coverage (i.e. the proportion of employees covered by the practices) by integrating institutional and agency theories. An empirical analysis is performed with a unique sample of Korean firms that experienced the East Asian financial crisis of 1997. The results show that while performance-related pay adoption was influenced by economic and social factors, performance-related pay coverage was related to political factors as well as economic and social factors. This finding suggests that while firms adopt performance-related pay practices in search of legitimacy, they do not blindly imitate such practices but rather proactively adapt them based on economic efficiency considerations. This study makes valuable contributions to research on institutionalism and remuneration by empirically identifying the conditions under which a pay practice adopted for social legitimacy fits or fails to fit the economic needs of the adopters.

The Creativity‐Performance Relationship: How Rewarding Creativity Moderates the Expression of Creativity

“…In these situations, they would be more likely to apply their creative ideas to areas that satisfy organizational objectives. That reward for creativity effects this shift also supports agency theory, which states that goal alignment between heretofore independent principal and agent goals can be accomplished through the usage of a human resource practice, namely, rewards (Kang & Yanadori, ).…”

“…There are thus several tightly intertwined themes here: the two components of creativity, the effect of extrinsic rewards on the expression of creativity, and the relationship between creativity and job performance. We seek to tie these themes together by integrating motivated information processing theory (Kunda, ) with agency theory (Eisenhardt, ; Kang & Yanadori, ; Wiseman, Cuevas‐Rodriguez, & Gomez‐Mejia, ) to investigate the yet unanswered question, “How does rewarding creativity influence the relationship between creativity and performance?”…”

“…Agency theory holds that agents, the employees of organizations, often pursue goals that are independent of their principal, the employing organization (Eisenhardt, ). Extrinsic rewards are one means to align agent and principal goals (Kang & Yanadori, ) and, in the case of creativity, are a means to ensure that an employee's creative expressions are aimed at meeting organizational goals.…”

Determinants and Performance Effects of Executive Pay Multiples

“…In our setting, confucian disdain for technical skills and the considerable supply of unskilled manual workers have led to low status and low wages for Korean production workers (Kang and yanadori 2011). We thus expect a firm's executive pay multiple to be negatively associated with the fraction of employees who constitute administrative staff (or office workers).…”

“…After the Asian financial crisis, however, Korean firms shifted their executive compensation plans toward performance-based compensation systems. This shift was triggered mainly by the demand for high-quality executives as Korean firms faced increasing global competition (Kang and yanadori 2011). The radical changes of corporate governance in Korea since the financial crisis-which include increasing shareholder protection, improving accounting transparency, and strengthening monitoring-have also pushed firms to increase emphasis on shareholder value and on better alignment of managerial incentives and shareholder value (Kim and Kim 2008).…”