CEO overpayment and underpayment: executives, governance and institutions

Abstract

Purpose Based on the findings of Aguinis et al. (2018) that only a few executives are properly compensated, the purpose of this paper is to examine potential causes and consequences of CEO overpayment and underpayment. Ineffective compensation of the CEO represents a governance failure by the board of directors. Better understanding the reasons for such failures may help boards to correct their processes and to enact more effective governance. Boards must look beyond the normally constrained focus of agency theory to examine executive characteristics and motivation. Thus, tailoring compensation plans and governance to the executive and organizational context requires attention to a broader set of theoretical notions. Design/methodology/approach Using the Aguinis et al. (2018) work, this paper conceptually identifies and explains the causes and consequences of CEO overpayment and underpayment along with their implications for governance and future research. Findings This paper identifies potential reasons for CEO overpayment and underpayment. For example, in addition to poor hiring decisions and inadequately designed compensation plans, CEO overpayment can occur because of executive hubris and greed. Alternatively, CEO underpayment may occur because of a poorly designed plan, inadequate information about the external labor market and the executive’s interests in non-pecuniary benefits (e.g. socio-emotional wealth, altruism). Without proper monitoring and oversight by the board, firm performance commonly suffers. Originality/value This work extends our understanding of why CEOs may be overpaid (e.g. hubris, greed) and why some executives may accept underpayment (e.g. desire for non-pecuniary benefits from SEW or altruism). This paper explains the consequences of ineffective corporate governance practices that allow inefficient CEO compensation. Finally, this paper explores several contingencies that can affect the governance practices and research needed to enhance our knowledge of this important area.

How does CEO pay slice influence corporate social responsibility? U.S.–Canadian versus Spanish–French listed firms

“…However, correlation coefficients on Spanish–French observations show that, although CSR is significantly positive correlated with IOW, positive significant correlation between CPS and IOW is lost. These findings confirm Hitt and Haynes's () who document a positive relationship between institutional ownership and CEO pay, both in the United States and around the world.…”

CEO Awards and Financial Misconduct

“…Thus, in our first moderating hypothesis, we consider a scenario where the award-winning CEO might not feel they are being treated as well as they should be treated. Compensation is perhaps the most important aspect along which CEOs wish to be treated well (Hitt & Haynes, 2018). CEOs judge the fairness of their pay based on how well peers are compensated (Wade, O'Reilly, & Pollock, 2006).…”

CEO pay is indeed decoupled from CEO performance: charting a path for the future

“…Also related to marginal productivity theory, part of the problem is that the board may make poor hiring decisions by ex ante misjudging the executive's marginal productivity, as noted in Hitt and Haynes (2018). A CEO may be over or underpaid because the board of directors managed the hiring process for the CEO in a flawed manner (e.g.…”

“…While not explicitly using the label managerialism, several of the commentaries addressed managerialism's core premise, which is the capacity of top executives to use their power and position to act opportunistically and take advantage of shareholders. Hitt and Haynes (2018) discussed several explanations for the decoupling of CEO pay and performance that may be attributed to managerialist context and motive. As a specific explanation, as mentioned by CEO pay is indeed decoupled Cannella and Sy (2018), the CEO has discretion as to when options are exercised.…”

“…Stated differently, a variety of individual characteristics may explain why a CEO may not respond to financial incentives. Some examples of factors under this rubric include CEO hubris (Li and Tang, 2010;Malmendier and Tate, 2005), CEO narcissism (Chatterjee and Hambrick, 2007;Gerstner et al, 2013), CEO greed (Hitt and Haynes, 2018), CEO openness to experience (Crossland et al, 2014), CEO identification with the firm (Boivie et al, 2011;Lange et al, 2015;Reina et al, 2014), CEO emotional attachment to the firm (Delgado-García and De La Fuente-Sabaté, 2010), CEO anxiety (Mannor et al, 2016) and congruence of CEO personality and values with firm culture (Nadkarni and Herrmann, 2010). CEO-organization interactions.…”