This study examines the CEO pay and firm performance link from two competing perspectives managerial power and board vigilance. From the managerial power perspective, a powerful CEO dominates the board and decouples the pay-performance link. In contrast, board vigilance maintains that boards represent shareholder interests by effectively tying the CEO's pay to firm performance. Consistent with the board vigilance perspective, the link was stronger when CEOs were older or longer tenured and when more committee members had CEO experience. The authors found no support for the managerial power perspective.
Get full access to this article
View all access options for this article.
References
1.
American Compensation Association
. (1994). Reading executive compensation information in proxy statements. Scottsdale, AZ: Author.
2.
Benston, G. J.
(1985). The self-serving management hypothesis: Some evidence. Journal of Accounting and Economics, 7, 67-84.
3.
Boyd, B. K.
(1995). CEO duality and firm performance: A contingency model. Strategic Management Journal, 16, 301-312.
4.
Braiotta, L.
, & Sommer, A. (1987). The essential guide to effective corporate board committees. Englewood Cliffs, NJ: Prentice Hall.
5.
Buchholtz, A. K.
, & Ribbens, B. (1994). Role of chief executive officers in takeover resistance: Effects of CEO incentives and individual characteristics. Academy of Management Journal, 37(3), 554-579.
6.
Byrne, D.
(1971). The attraction paradigm. San Diego, CA: Academic Press.
7.
Byrne, D.
, & Neuman, J. H. (1992). The implications of attraction research for organizational issues. In K. Kelley (Ed.), Issues, theory, and research in industrial and organizational psychology (pp. 29-70). New York: Elsevier.
8.
Carlsson, R.
, & Karlsson, K. (1970). Age, cohorts, and the generation of generations. American Sociological Review, 35, 710-718.
9.
Cohen, J.
, & Cohen, P. (1983). Applied multiple regression/correlation analysis for the behavioral sciences. Hillsdale, NJ: Lawrence Erlbaum.
10.
Cooper, W. H.
, & Richardson, A. J. (1986). Unfair comparisons. Journal of Applied Psychology, 71(2), 179-184.
11.
Coughlan, A. T.
, & Schmidt, R. M. (1985). Executive compensation, managerial turnover, and firm performance. Journal of Accounting and Economics, 7, 43-66.
12.
Cronbach, L. J.
, & Furby, L. (1972). How should we measure "change"-or should we?Psychological Bulletin, 74, 68-80.
13.
Crosson, C.
(1993). Companies tying CEO pay to performance. National Underwriter, 97, 3.
14.
Crystal, G.
(1991). In search of excess: The overcompensation of American executives. New York: Norton.
15.
Dalton, D. R.
, & Kesner, I. F. (1985). Organizational performance as an antecedent Inside/outside chief executive succession: An empirical assessment. Academy of Management Journal, 28, 749-762.
16.
D'Aveni, R.
(1990). Top managerial prestige and organizational bankruptcy. Organization Science, 1(2), 121-142.
17.
D'Aveni, R. A.
, & Kesner, I. F. (1993). Top managerial prestige, power, and tender offer response: A study of elite social networks and target firm cooperation during takeovers. Organization Science, 4(2), 123-151.
18.
Demski, J.
, Patell, J., & Wolfson, M. (1984). Decentralized choice of monitoring systems. Accounting Review, 14, 16-34.
19.
Donaldson, L.
, & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of Management, 16(1), 49-64.
20.
Eisenhardt, K. M.
(1989). Agency theory: Assessment and review. Academy of Management Review, 14(1), 57-74.
21.
Estes, R. M.
(1980, July-August). Corporate governance in the courts. Harvard Business Review, 58, 50-58.
22.
Fama, E. F.
, & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26, 301-325.
23.
Finkelstein, S.
(1992). Power in top management teams: Dimensions, measurement, and validation. Academy of Management Journal, 35, 505-553.
24.
Fmkelstein, S.
, & D'Aveni, R. (1994). CEO duality as a double-edged sword: How boards of directors balance entrenchment avoidance and unity of command. Academy of Management Journal, 37(5), 1079-1108.
25.
Frederickson, J.
, Hambrick, D., & Baunmin, S. (1988). A model of CEO dismissal. Academy of Management Review, 13, 255-270.
26.
Galaskiewicz, J.
(Ed.). (1985). Interorganizational relations. Annual review of sociology. Palo Alto, CA: Annual Reviews.
27.
Geneen, H. S.
(1984, September 17). Why directors can't protect the shareholders. Fortune, 110, 28-32.
28.
Hambrick, D.
, & Mason, P. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9(2), 193-206.
29.
Harris, M.
, & Raviv, A. (1979). Optimal incentive contracts with imperfect information. Journal of Economic Theory, 20, 231-259.
30.
Harrison, J. R.
, Torres, D. L., & Kukalis, S. (1988). The changing of the guard: Turnover and structural change in the top-management positions. Administrative Science Quarterly, 33(2), 211-232.
31.
Herman, E. S.
(1981). Corporate control, corporate power. New York: Cambridge University Press.
32.
Hermann, M.
(1987). The executive's lament: On structuring CEO-board relations in the public and non-profit sectors. Ohio State University's Quarterly Report, 11(3), 1-10.
33.
Hickson, D. J.
, Lee, C. A., Schneck, R. E., & Penning, J. M. (1971). A strategic contingencies theory of interorganizational power. Administrative Science Quarterly, 16, 216-229.
34.
Hill, C.
, & Phan, P. (1991). CEO tenure as a determinant of CEO pay. Academy of Management Journal, 34, 707-717.
35.
Hoskisson, R. E.
, Hitt, M. A., Turk, T. A., & Tyler, B. B. (1989). Balancing corporate strategy and executive compensation: Agency theory and corporate governance. In G. R. Ferris & K. D. Rowland (Eds.), Research in personnel and human resources management (pp. 25-58). Greenwich, CT: JAI.
36.
Jensen, M. C.
(1988). The takeover controversy: Analysis and evidence. In J. C. Coffee, L. Lowenstein, & S. Rose-Ackerman (Eds.), Knights, raiders, and targets: The impact of the hostile takeover (pp. 315-354). New York: Oxford University Press.
37.
Jensen, M. C.
, & Murphy, K. J. (1990a). CEO incentives-It's not how much you pay but how. Harvard Business Review, 68(3), 138-149.
38.
Jensen, M. C.
, & Murphy, K. J. (1990b). Performance pay and top management incentives. Journal of Political Economy, 98(2), 225-264.
39.
Johnson, R. A.
, Hoskisson, R. E., & Hitt, M. A. (1993). Board of director involvement in restructuring: The effects of board versus managerial controls and characteristics. Strategic Management Journal, 14, 33-50.
40.
Kanter, R.
(1977). Men and women of the corporation. New York: Basic Books.
41.
Kay, I. T.
, Robinson, R. F., & Krystal, G. (1994, January/February). Misguided attacks on executive pay hurt shareholders. Compensation and Benefits Review, 26, 25-37.
42.
Kerr, J.
, & Bettis, R. A. (1987). Boards of directors, top management compensation, and shareholder returns. Academy of Management Journal, 30, 645-664.
43.
Kesner, I. F.
(1988). Directors' characteristics and committee membership. Academy of Management Journal, 31, 66-84.
44.
Kosnik, R. D.
(1987). Greenmail: A study in board performance in corporate governance. Administrative Science Quarterly, 32, 163-185.
45.
Larcker, D.
(1983). The association between performance plan adoption and corporate capital investment. Journal of Accounting and Economics, 5, 3-30.
46.
Lawler, E. E.
(1971). Pay and organizational effectiveness. New York: McGraw-Hill.
47.
Lederer, J. L.
, & Weinberg, C. R. (1996). CEO compensation: Share the wealth. Chief Executive, 116, 30-47.
48.
Lewellen, W.
, Loderer, C., & Martin, K. (1987). Executive compensation and executive incentive problems: An empirical analysis. Journal of Accounting and Economics, 9, 287-310.
49.
Lorsch, J. W.
(1995). Empowering the board. Harvard Business Review, 73(1), 107-117.
50.
Lorsch, J. W.
, & Maclver, E. (1989). Pawns or potentates: The reality of America's corporate boards. Cambridge, MA: Harvard Business School Press.
51.
Mace, M. L.
(1971). Directors: Myth and reality. Cambridge, MA: Harvard University Press.
52.
Main, G. M.
, O'Reilly, C. A., & Wade, J. (1995). The CEO, the board of directors and executive compensation: Economic and psychological perspectives. Industrial and Corporate Change, 4(2), 293-332.
53.
Mallette, P.
, & Fowler, K. I. (1992). Effects of board composition and stock ownership on the adoption of "poison pills."Academy of Management Review, 35, 1010-1035.
54.
Molz, R.
(1988). Managerial domination of boards of directors and financial performance. Journal of Business Research, 16, 235-250.
55.
Morck, R.
, Shleifer, A., & Vishny, R. W. (1989). Alternative mechanisms for corporate control. American Economic Review, 79, 842-852.
56.
Murphy, K.
(1985). Corporate performance and managerial remuneration: An empirical analysis. Journal of Accounting and Economics, 7, 11-42.
57.
O'Reilly, C. A.
, Main, B., & Ciystal, G. (1988). CEO compensation as tournament and social comparison: A tale of two theories. Administrative Science Quarterly, 33, 257-274.
58.
Pearce, J. A.
, & Zahra, S. A. (1991). The relative power of CEOs and boards of directors: Associations with corporate performance. Strategic Management Journal, 12, 135-153.
59.
Pfeffer, J.
(1972). Size and composition of corporate boards of directors: The organization and its environment. Administrative Science Quarterly, 17, 218-229.
60.
Pfeffer, J.
(1973). Size, composition, and function of boards of directors: A study of organization-environment linkage. Administrative Science Quarterly, 18, 349-364.
61.
Pfeffer, J.
(1981). Power in organizations. Cambridge, MA: Ballinger.
62.
Pfeffer, J.
, & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. New York: HarperCollins.
63.
Platt, J. R.
(1964). Strong inference. Science, 146, 347-353.
64.
Rechner, P. L.
, & Dalton, D. R. (1991). CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12, 155-160.
65.
Singh, H.
, & Harianto, F. (1989). Top management tenure, corporate ownership structure, and the magnitude of golden parachutes. Strategic Management Joumal, 10, 143-156.
66.
Star, M. G.
(1993). The pay-performance link. Pensions and Investments, 21, 17.
67.
Staw, B.
, Sandelands, L., & Dutton, J. (1981). Threat rigidity effects in organizational behavior: A multilevel analysis. Administrative Science Quarterly, 26, 501-524.
68.
Stevens, J.
, Beyer, J., & Trice, H. (1978). Assessing personal, role, and organizational predictors of managerial commitment. Academy of Management Journal, 21, 380-396.
69.
Stinchcombe, A. L.
(1968). Constructing social theories. Chicago: University of Chicago Press.
70.
Tosi, H. L.
, & Gomez-Mejia, L. (1989). The decoupling of CEO pay and performance: An agency theory perspective. Administrative Science Quarterly, 34, 169-189.
71.
Tushman, M.
, & Romanelli, E. (1983). Organization evolution: A metamorphosis model of convergence and reorientation. In L. L. Cummings, & B. M. Staw (Eds.), Research in organizational behavior: An annual series of analytical essays and critical reviews (Vol. 7, pp. 171-122). Greenwich, CT: JAI.
72.
Ungson, G.
, & Steers, R. (1984). Motivation and politics in executive compensation. Academy of Management Review, 9, 313-323.
73.
Vance, S. C.
(1978). Corporate governance: Assessing corporate performance by boardroom attributes. Journal of Business Research, 6, 203-220.
74.
Vance, S. C.
(1983). Corporate leadership: Boards, directors, and strategy. New York: McGraw-Hill.
75.
Vroom, V.
, & Pahl, B. (1971). Relationship between age and risk-taking among managers. Journal of Applied Psychology, 55, 399-405.
76.
Wade, J.
, O'Reilly, C. A., & Chandratat, I. (1990). Golden parachutes: CEOs and the exercise of social influence. Administrative Science Quarterly, 35, 587-603.
77.
Walking, R.
, & Long, M. (1984). Agency theory, managerial welfare, and takeover bid resistance. Rand Journal of Economics, 15, 54-68.
78.
Walsh, J. P.
, & Seward, J. K. (1990). On the efficiency of internal and external corporate control mechanisms. Academy of Management Review, 15(3), 421-458.
79.
Walters, B.
, Hardin, T., & Shick, J. (1995). Top executive compensation: equity or excess? Implications for regaining American competitiveness. Journal of Business Ethics, 14, 227-234.
80.
Westphal, J.
, & Zajac, E. (1995). Who shall govern? CEO/board power, demographic similarity, and new director selection. Administrative Science Quarterly, 40, 60-83.
81.
Westphal, J. D.
, & Zajac, E. J. (1994). Substance and symbolism in CEOs' long-term incentive plans. Administrative Science Quarterly, 39, 367-390.
82.
Wiersema, M.
, & Bantel, K. (1992). Top management team demography and corporate strategic change. Academy of Management Journal, 35, 91-121.
83.
Wolfson, N.
(1984). The modern corporation: Free market versus regulation. New York: McGraw-Hill.
84.
Zajac, E.
, & Kraatz, M. (1993). A diametric forces model of strategic change: Assessing the antecedents and consequences of restructuring in the higher education industry. Strategic Management Journal, 14, 83-102.
85.
Zajac, E. J.
, & Westphal, J. D. (1994). The costs and benefits of managerial incentives and monitoring in large U. S. corporations: When is more not better?Strategic Management Journal, 15, 121-142.
86.
Zenger, T. R.
, & Lawrence, B. S. (1989). Organizational demography: The differential effects of age and tenure distributions on technical communications. Academy of Management Journal, 32, 353-376.
