Fairness, envy, guilt and greed: Building equity considerations into agency theory

Pepper, Alexander; Gosling, Tom; Gore, Julie

doi:10.1177/0018726714554663

Cited by 26 publications

(15 citation statements)

References 86 publications

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“…While previous research has argued that fairness is equally germane to senior executives as it is to other workers (Gomez‐Mejia & Wiseman, ; Wade, O'Reilly, & Pollock, ), researchers have generally not considered these in combination with each other. Importantly, recent research building on behavioral agency theory (Wiseman & Gomez‐Mejia, ) challenges some of the standard tenets of agency theory and tournament theory, demonstrating that equity considerations are important and often overlooked in the executive compensation literature (e.g., Pepper & Gore, ; Pepper, Gosling, & Gore, ). Although we measure firm performance and not perception of fairness per se, our results suggest that horizontal pay dispersion and vertical pay compression could be perceived relatively more fairly in prospectors than in defenders, whereas horizontal pay compression and vertical pay dispersion could be seen as being fairer in defenders than in prospectors.…”

Section: Discussioncontrasting

confidence: 99%

Right on the money? The contingent effects of strategic orientation and pay system design on firm performance

Tenhiälä

Laamanen

2018

Strategic Management Journal

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Research Summary: This article extends prior research on the performance implications of the fit between a firm's strategic orientation and its pay system design. Whereas prior research has shown that matching the pay system design to the strategic orientation of the firm generally contributes to higher performance, most studies have examined the pay systems of the upper echelons and employees separately. Based on an analysis that accounts for both horizontal and vertical pay dispersion, we find that, whereas growth‐oriented firms (prospectors) tend to benefit from high horizontal pay dispersion, efficiency‐oriented firms (defenders) perform better with high vertical pay dispersion and low relative base pay. Overall, our findings contribute to an improved understanding of how to optimize the pay systems of firms with different strategic orientations. Managerial Summary: We study how the optimal configuration of the overall pay system differs between firms that pursue growth‐oriented and efficiency‐oriented strategies. Our results show that growth‐oriented firms (prospectors) benefit from pay structures with relatively large pay differentials horizontally between employees based on ability, effort, and results. Efficiency‐oriented firms (defenders), on the other hand, benefit from pay structures with relatively larger differences in pay across organizational levels vertically. Our findings suggest that while defenders should pay special attention to average pay levels to avoid over compensating their employees relative to competitors, prospectors should pay attention to the CEO‐employee pay differentials to avoid overcompensating executives relative to employees. Overall, our findings provide further evidence on the importance of matching the pay system design to a firm's strategy.

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Section: Discussioncontrasting

confidence: 99%

Right on the money? The contingent effects of strategic orientation and pay system design on firm performance

Tenhiälä

Laamanen

2018

Strategic Management Journal

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“…For example, behavioral agency theory reevaluates predictions in view of more realistic assumptions about agent behavior, with particular emphasis on internal governance (Pepper and Gore, ). Researchers have incorporated prospect theory (Martin, Gomez‐Mejia, and Wiseman, ) and equity theory (Pepper, Gosling, and Gore, ) into agency theory predictions about how compensation structures influence managerial behavior. We build on the notion of overlaying cognitive biases onto agency theory prescriptions and extend this approach to external governance mechanisms.…”

Section: Introductionmentioning

confidence: 99%

External corporate governance and financial fraud: cognitive evaluation theory insights on agency theory prescriptions

Shi

Connelly

Hoskisson

2016

Strategic Management Journal

219

152

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Agency theory suggests that external governance mechanisms (e.g., activist owners, the market for corporate control, securities analysts) can deter managers from acting opportunistically. Using cognitive evaluation theory, we argue that powerful expectations imposed by external governance can impinge on top managers' feelings of autonomy and crowd out their intrinsic motivation, potentially leading to financial fraud. Our findings indicate that external pressure from activist owners, the market for corporate control, and securities analysts increases managers' likelihood of financial fraud. Our study considers external governance from a top manager's perspective and questions one of agency theory's foundational tenets: that external pressure imposed on managers reduces the potential for moral hazard. Managerial SummaryMany of us are familiar with stories about top managers 'cooking the books' in one way or another. As a result, companies and regulatory bodies often implement strict controls to try to prevent financial fraud. However, cognitive evaluation theory describes how those external controls could actually have the opposite of their intended effect because they rob managers of their intrinsic motivation for behaving appropriately. We find this to be the case. When top managers face more stringent external control mechanisms, in the form of activist shareholders, the threat of a takeover, or zealous securities analysts, they are actually more likely to engage in financial misbehavior. Running title: External Corporate Governance and Financial Fraud 3Strategy scholars and policymakers have devoted renewed attention in recent years to 'external' mechanisms of corporate governance, such as the monitoring and control by stakeholders that are not inside the organization. For example, a recent review of this literature seeks to 'bring external corporate governance into the corporate governance puzzle' more fully (Aguilera et al., 2015).Governance research has yielded important insights about these external governance mechanisms (Coffee, 2006), but few have considered their potentially adverse ramifications. Toward this end, we incorporate a behavioral perspective of managers into our understanding of external governance to highlight how the expectations imposed by external governance could impose on managers' motivation, and we thus uncover the potential harm such governance mechanisms might introduce.

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“…Unfortunately, the corporate failures and public distress over the lucrative compensation have revealed that fairness has not taken into consideration when executive compensation schemes are designed (Chaigneau, 2018;Ferracone, 2010). Fairness is a social and ethical norm and it deals with ‗what is just' and ‗what should be done' (Pepper, Gosling, & Gore, 2015). It includes two approaches: the equality (egalitarian) approach and the equity approach.…”

Section: Introductionmentioning

confidence: 99%

Intellectual illumination of isolated scholars: An online scholarly conference in the epoch of pandemic

Kostyuk¹,

Guedes²,

Govorun³

2020

Corporate Governance: Examining Key Challenges and Perspectives

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Fairness, envy, guilt and greed: Building equity considerations into agency theory

Cited by 26 publications

References 86 publications

Right on the money? The contingent effects of strategic orientation and pay system design on firm performance

Right on the money? The contingent effects of strategic orientation and pay system design on firm performance

External corporate governance and financial fraud: cognitive evaluation theory insights on agency theory prescriptions

Intellectual illumination of isolated scholars: An online scholarly conference in the epoch of pandemic

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