This paper examines variations in executive pay as a function of CEO power. We assume that CEOs optimize their pay conditional upon their ability to shape decisions that favour their interests. Power is inferred from overt manifestations such as share holdings, but also from covert sources such as a CEOs' social capital. Two components of compensation are considered: base pay and bonus. While financial performance, firm size, and other factors are held constant, the results show overt power as measured by CEO, and CEO-family equity holdings, to have a curvilinear relationship with executive compensation. Proxies of covert power include tenure, being (one of) the founder(s), and firm diversification. These variables magnify or moderate the effect of equity holdings on compensation. The power effects are most pronounced for the size of CEO bonus.
Allan, Michael P.1981'Power and privilege in the large corporation: Corporate control and managerial compensation' . American Journal of Sociology86: 1112-1123 .
2.
Aram, John D. , and Scott S. Cowen1983Information for corporate directors. The role of the board in the management process. NAA Press: New York .
3.
Baker, George P , Michael C. Jensen , and Kevin J. Murphy1990'Compensation and incentives: Practice vs. Theory' . Journal of Finance43/3: 593-616 .
4.
Balkin, David B. , and Luis R. Gomez-Mejia1990'Matching compensation and organizational strategies' . Strategic Management Journal 11: 153-169 .
5.
Barkema, Harry G.1995'Do top managers work harder when they are monitored?'Kyklos48/1: 19-42 .
6.
Barkema, Harry G. , Paul Geroski , and Joachim Schwalbach1997'Managerial compensation, strategy, and firm performance' . International Journal of Industrial Organisation15/4: 413-416 .
7.
Barkema, Harry , and Luis R. Gomez-Mejia1998'Managerial compensation and firm performance' . Academy of Management Journal41/2: 135-145 .
8.
Berg, Norm A.1969'What's different about conglomerate management?' . Harvard Business Review47/6: 112-120 .
9.
Berg, Norm A.1973'Corporate role in diversified companies' in Business policy teaching and research. B. Taylor and K. MacMillen (eds.), 15-27. New York: Halstead Press .
10.
Blau, Peter M.1964Exchange and power in social life. New York: Wiley .
11.
Boyd, Brian K.1994'Board control and CEO compensation' . Strategic Management Journal15/5: 335-344 .
12.
Byrd, John W. , and Kent A. Hickman1992'Do outside directors monitor managers?' . Journal of Financial Economics32: 195-221 .
13.
Burt, Ronald S.1992Structural holes. Cambridge: Harvard University Press .
Davis, Gerald F. , and Suzanne K. Stout1992'Organization theory and the market for corporate control: A dynamic analysis of the characteristics of large takeover targets, 1980-1990' . Administrative Science Quarterly 37: 605-633 .
16.
Deci, Edward L.1975'Notes on the theory and metatheory of intrinsic motivation' . Organizational Behaviour and Human Performance15: 130-145 .
17.
Fama, Eugene F. , and Michael C. Jensen1983'Separation of ownership and control' . Journal of Law and Economics26/2: 301-326 .
18.
Finkelstein, Sydney1992'Power in top management teams' . Academy of Management Journal35: 505-538 .
19.
Finkelstein, Sydney , and Donald C. Hambrick1988'Chief executive compensation: A synthesis and reconciliation' . Strategic Management Journal9: 543-558 .
20.
Finkelstein, Sydney , and Donald C. Hambrick1989'Chief executive compensation: A study of the interxection of markets and political processes' . Strategic Management Journal10: 121-134 .
21.
Finkelstein, Sydney , and Donald C. Hambrick1996Strategic leadership: Top executives and their organizations. Minneapolis: West Publishing Company .
22.
Finkelstein, Sydney , and Brian K. Boyd1998'How much does the CEO matter?: The role of managerial discretion in the setting of CEO compensation' . Academy of Management Journal41/2: forthcoming.
23.
French, John P.R. , and Raven, Bertram1959'The bases of social power' in Studies in Social Power. D. Cartwright (ed.), 150-167. Ann Arbor: University of Michigan .
24.
Frey, Bruno S.1992'Tertium Datur: Pricing, regulating and intrinsic motivation' . Kyklos45: 161-184 .
25.
Frey, Bruno S.1993'Does monitoring increase work effort?'Economic Inquiry31: 663-670 .
26.
Galbraith, John K.1967The affluent society. Boston: Houghton Miffin .
27.
Geneen, Harold S.1984'Why directors can't protect the shareholders' . Fortune, September 17, 28-32 .
28.
Gerhard, B. , and Gerhard T. Milkovich1990'Organizational differences in managerial compensation and financial performance' . Academy of Management Journal33: 663-691 .
29.
Gilson, Steward C.1989'Management turnover and financial distress' . Journal of Financial Economics25: 241-262 .
30.
Gomez-Mejia, Luis R.1992'Structure and process of diversification, compensation strategy, and firm performance' . Strategic Management Journal13/5: 381-397 .
31.
Gomez-Mejia, Luis R.1994'Executive Compensation: A reassessment and a future research agenda' . Research in Personnel and Human Resource Management12: 161-222 .
32.
Gomez-Mejia, Luis R. , and David B. Balkin1992'The determinants of faculty pay: an agency theory perspective' . Academy of Management Journal 35: 921-955 .
33.
Gomez-Mejia, Luis R. , Henry Tosi , and Thomas Hinkin1987'Managerial control, performance, and executive compensation' . Academy of Management Journal30: 51-70 .
34.
Gomez-Mejia, Luis R. , and Robert Wiseman1997'Reframing executive compensation: An assessment and outlook' . Journal of Management23/3: 291-374 .
35.
Hambrick, Donald , and Sydney Finkelstein1995'The effects of ownership structure on conditions at the top: The case of CEO pay raises' . Strategic Management Journal16: 175-194 .
36.
Hickson, David J. , C. Robin Hinings , Charles A. Lee , Rodney E. Schneck , and Johannes M. Pennings1971'A strategic contingencies' theory of intraorganizational power' . Administrative Science Quarterly16: 216-229 .
37.
Hill, Charles W.L. , and P. Phan1991'CEO tenure as a determinant of CEO pay' . Academy of Management Journal34/3: 707-717 .
38.
Hofstede, Geert H.1980Culture's consequences: International differences in work-related values. Beverly Hills, CA: Sage .
39.
Hofstede, Geert H1983'The cultural relativity of organizational practices and theories' . Journal of International Business Studies (Fall): 75-89 .
40.
Homans, George C.1961Social behaviour: its elementary forms. New York: Harcourt, Brace, Jovanovich .
41.
Jensen, Michael C.1993'The modern industrial revolution, exit, and the failure of internal control systems' . Journal of Finance 48/3: 831-880 .
42.
Jensen, Michael C. , and William Meckling1976'Theory of the firm: managerial behaviour, agency costs and ownership structure' . Journal of Financial Economics3: 305-360 .
43.
Jensen, Michael C. , and Kevin J. Murphy1990'Performance pay and top management incentives' . Journal of Political Economy98: 225-264 .
44.
Kanter, Rosabeth M.1977Men and women of the corporation. New York: Harper .
45.
Kaplan, Steven N.1989'The effects of management buyouts on operations and value' . Journal of Financial Economics24: 217-254 .
46.
Krackhard, David1991'Asessing the political landscape: structure, cognition and power in organizations' . Administrative Science Quarterly35: 342-369 .
47.
Lambert, Richard A. , and David F. Larcker1987'An analysis of the use of accounting and market measures of performance in executive compensation contracts' . Journal of Accounting Research25 (Supplement): 85-125 .
48.
Lorsch, Jay W. , and S.A. Allen1973Managing diversity and interdependence. Boston: Division of Research, Harvard Business School .
49.
Mace, Myles L.1971Directors: Myth and reality. Cambridge, MA: Harvard University Graduate School of Business Administration .
50.
Malatesta, P.H. , and Richard A. Walkling1988'Poison pill securities: Stockholder wealth, profitability, and ownership structure' . Journal of Financial Economics20: 347-376 .
51.
McEachern, William A.1975Managerial control and performance. Lexington, MA: Lexington Books .
52.
McConnell, John J. , and Henry Servaes1990'Additional evidence on equity ownership and corporate value' . Journal of Financial Economics27: 595-612 .
53.
Milgrom, Paul1988'Employment contracts, influence activities and efficient organization design' . Journal of Political Economy96: 42-60 .
54.
Milgrom, Paul , and John Roberts1992Economics, organization and management. Englewood Cliffs, NJ: Prentice-Hall .
55.
Morck, Randall , Andrei Shleifer , and Robert W. Vishny1988'Management ownership and market evaluation' . Journal of Financial Economics20: 293-315 .
56.
Murphy, Kevin J.1985'Corporate performance and managerial renumeration: An empirical analysis' . Journal of Accounting and Economics7: 11-42 .
57.
Pearce, Jon A. , and Shaheer A. Zahra1991'The relative powers of CEOs and boards of directors: Association with corporate performance' . Strategic Management Journal12/2: 135-154 .
58.
Pennings, Johannes M.1993'Strategic reward systems: A cross national comparison' . Journal of Management Studies30: 261-280 .
59.
Pfeffer, Jeffrey1992Managing with power. Boston: Harvard Business School Press .
60.
Pfeffer, Jeffrey , and Konrad Allision1991'The effect of individual power on earnings' . Work and Occupations18/4: 385-414 .
61.
Ryngaert, Michael1988'The effect of poison pill securities on shareholder wealth' . Journal of Financial Economics20: 377-418 .
62.
Rumelt, Richard P.1974Strategy, structure, and economic performance. Boston: Division of Research, Boston Harvard Business School .
63.
Rumelt, Richard P.1982'Diversification strategy and profitability' . Strategic Management Journal3: 359-369 .
64.
Salancik, Gerald , and Jeffrey Pfeffer1980'Effects of ownership and performance on executive tenure in U.S. corporations' . Academy of Management Journal23: 653-664 .
65.
Salter, Malcolm S.1973'Tailor incentive compensation to strategy' . Harvard Business Review51/2: 94-102 .
66.
Singh, Harbir , and Farid Harianto1989'Top management tenure, corporate ownership structure and the magnitude of golden parachutes' . Strategic Management Journal10: 143-156 .
67.
Smith, Abbie1990'Corporate ownership structure and performance: The case of management buyouts' . Journal of Financial Economics27: 143-164 .
68.
Tosi, Henry L. , and Luis R. Gomez-Mejia1989'The decoupling of CEO pay and performance: An agency theory perspective' . Administrative Science Quarterly34: 169-190 .
69.
Tosi, Henry L. , and Luis R. Gomez-Mejia1994'CEO compensation, monitoring and firm performance' . Academy of Management Journal37: 1002-1016 .
70.
Wade, James , Charles A. O'Reilly , and Ike Chandradat1990'Golden parachutes: CEOs and the exercise of social influence' . Administrative Science Quarterly35: 587-603 .
71.
Warner, Jerold B. , Ross L. Watts , and Karin Wruck1988'Stock prices and top management changes' . Journal of Financial Economics20: 461-492 .
72.
Weisbach, Michael1988'Outside directors and CEO turnover' . Journal of Financial Economics20: 431-460 .
73.
Westphal, James , and Ed Zajac1994'Substance and symbolism in CEOs' long-term incentive plans' . Administrative Science Quarterly39: 367-390 .
74.
Whyte, Harrison C.1992Identity and control: A structural theory of action. Princeton, NJ: Princeton University Press .
75.
Worrell, Dan K. , Carol Nemec , and Wallance Davidson1997'One hat too many: Key executives, plurality and shareholder wealth' . Strategic Management Journal18/7: 499-507 .
