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Worth, words, and the justification of executive pay
Author(s) -
Wade James B.,
Porac Joseph F.,
Pollock Timothy G.
Publication year - 1997
Publication title -
journal of organizational behavior
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.938
H-Index - 177
eISSN - 1099-1379
pISSN - 0894-3796
DOI - 10.1002/(sici)1099-1379(199711)18:1+<641::aid-job910>3.0.co;2-m
Subject(s) - executive compensation , psychology , executive functions , social psychology , cognitive psychology , cognition , compensation (psychology) , neuroscience
This study examines how the compensation committees of a sample of U.S. corporations from the S & P 500 justify their compensation practices to shareholders. Drawing from research on organizational legitimacy as a theoretical base, we examine the effects of ownership structure, CEO pay, and organizational performance on the frequencies of three types of compensation justifications: external validations, shareholder alignment statements, and discussions of company performance. We find that when companies have more concentrated and active outside owners, they are much more likely to justify their compensation practices by citing the role of compensation consultants as advisors in the compensation‐setting process. They are also more likely to discuss the alignment of managerial and shareholder interests, and to downplay a company's accounting returns. Companies that pay their CEOs large base salaries are also more likely to cite the role of consultants, and, for those with dispersed ownership, to discuss shareholder alignment. High accounting returns lead companies to emphasize accounting performance in their compensation justifications, and to downplay market returns. High stock price volatility leads companies to de‐emphasize market returns. We discuss the implications of these findings for research and theory on the symbolic aspects of company–shareholder relationships. © 1997 John Wiley & Sons, Ltd.