The two sides of CEO pay injustice: A power law conceptualization of CEO over and underpayment

Management Research

Volumn 16, Issue 1, 2018, Pages 3-30

  Aguinis, Herman ^a   Martin, Geoffrey P ^b   Gomez Mejia, Luis R ^c   O’Boyle, Ernest H ^d   Joo, Harry ^e  

^a GEORGE WASHINGTON UNIVERSITY   (United States)

^b UNIVERSITY OF MELBOURNE   (Australia)

^c ARIZONA STATE UNIVERSITY   (United States)

^d UNIVERSITY OF IOWA   (United States)

^e UNIVERSITY OF DAYTON   (United States)

Author keywords

Agency theory; CEO pay; CEO performance; Chief executive officers, CEOs; Corporate governance; Executive compensation; Firm performance; Justice; Power

Indexed keywords

EID: 85022146076     PISSN: 15365433     EISSN: 15580946     Source Type: Journal    
DOI: 10.1108/MRJIAM-02-2017-0731     Document Type: Article

References (87)

1. Abernethy, M.A., Kuang, Y.F. and Qin, B. (2015), “The influence of CEO power on compensation contract design”, The Accounting Review, Vol. 90 No. 4, pp. 1265-1306.
2. Adams, J.S. (1965), “Inequity in social exchange”, In Berkowitz, L. (Ed.), Advances in Experimental Social Psychology, Academic Press, New York, NY, Vol. 2, pp. 267-299.
3. Aguinis, H. and Bradley, K.J. (2015), “The secret sauce for organizational success: managing and producing star performers”, Organizational Dynamics, Vol. 44 No. 3, pp. 161-168.
4. Aguinis, H., Gottfredson, R.K. and Joo, H. (2013), “Best-practice recommendations for defining, identifying, and handling outliers”, Organizational Research Methods, Vol. 16 No. 2, pp. 270-301.
5. 2 goodness-of-fit test results: implications for strategic management research”, In Bergh, D.D. and Ketchen, D.J. (Eds), Research Methodology in Strategy and Management, pp. 111-120, Emerald, Howard House.
6. Aguinis, H. and O’Boyle, E. (2014), “Star performers in twenty-first-century organizations”, Personnel Psychology, Vol. 67 No. 2, pp. 313-350.
7. Aguinis, H., O’Boyle, E., Gonzalez-Mulé, E. and Joo, H. (2016), “Cumulative advantage: Conductors and insulators of heavy-tailed productivity distributions and productivity stars”, Personnel Psychology, Vol. 69 No. 1, pp. 3-66.
8. Anschuetz, N. (1997), “Profiting from the ‘80-20 rule of thumb’”, Journal of Advertising Research, Vol. 37 No, 6, pp. 51-66.
9. Bebchuk, L.A. and Fried, J.M. (2009), Pay without Performance: The Unfulfilled Promise of Executive Compensation, Harvard University Press, Cambridge, MA.
10. Bebchuk, L.A. and Fried, J.M. (2010), “Paying for long-term performance”, University of Pennsylvania Law Review, Vol. 158 No. 7, pp. 1915-1959.
11. Bergh, D.D., Aguinis, H., Heavey, C., Ketchen, D.J., Boyd, B.K., Su, P., Lau, C. and Joo, H. (2016), “Using Meta-analytic structural equation modeling to advance strategic management research: guidelines and an empirical illustration via the strategic leadership-performance relationship”, Strategic Management Journal, Vol. 37 No. 3, pp. 477-497.
12. Bernerth, J.B. and Aguinis, H. (2016), “A critical review and best-practice recommendations for control variable usage”, Personnel Psychology, Vol. 69 No. 1, pp. 229-283.
13. Bizjak, J.M., Lemmon, M.L. and Naveen, L. (2008), “Does the use of peer groups contribute to higher pay and less efficient compensation?”, Journal of Financial Economics, Vol. 90 No. 2, pp. 152-168.
14. Bogle, J.C. (2008), “Reflections on CEO compensation”, Academy of Management Perspectives, Vol. 22 No. 2, pp. 21-25.
15. Bosco, F.A., Aguinis, H., Singh, K., Field, J.G. and Pierce, C.A. (2015), “Correlational effect size benchmarks”, The Journal of Applied Psychology, Vol. 100 No. 2, pp. 431-449.
16. Bromiley, P. (1991), “Testing a causal model of corporate risk taking and performance”, Academy of Management Journal, Vol. 34 No. 1, pp. 37-59.
17. Byrd, J.W. and Hickman, K.A. (1992), “Do outside directors monitor managers? Evidence from tender offer bids”, Journal of Financial Economics, Vol. 32 No. 2, pp. 195-221.
18. Carpenter, M.A. and Sanders, W.M. (2002), “Top management team compensation: the missing link between CEO pay and firm performance?”, Strategic Management Journal, Vol. 23 No. 4, pp. 367-375.
19. Clauset, A., Shalizi, C.R. and Newman, M.E.J. (2009), “Power-law distributions in empirical data”, SIAM Review, Vol. 51 No. 4, pp. 661-703.
20. Coles, J.L., Daniel, N.D. and Naveen, L. (2006), “Managerial incentives and risk-taking”, Journal of Financial Economics, Vol. 79 No. 2, pp. 431-468.
21. Conyon, M.J., Peck, S.I. and Sadler, G.V. (2009), “Compensation consultants and executive pay: evidence from the United States and the United Kingdom”, Academy of Management Perspectives, Vol. 23 No. 1, pp. 43-55.
22. Core, J. and Guay, W. (1999), “The use of equity grants to manage optimal equity incentive levels”, Journal of Accounting and Economics, Vol. 28 No. 2, pp. 151-184.
23. Core, J.E., Guay, W.R. and Larcker, D.F. (2003), “Executive equity compensation and incentives: a survey”, Economic Policy Review, Vol. 9 No. 1, pp. 27-50.
24. Crystal, G.S. (1990), “The great CEO pay sweepstakes”, Fortune, Vol. 121 No. 14, pp. 99-102.
25. Delbridge, R. and Fiss, P. (2013), “Styles of theorizing and the social organization of knowledge”, Academy of Management Review, Vol. 38 No. 3, pp. 325-331.
26. Devers, C.E., Cannella, A.A., Reilly, G.P. and Yoder, M.E. (2007), “Executive compensation: a multidisciplinary review of recent developments”, Journal of Management, Vol. 33 No. 6, pp. 1016-1072.
27. Devers, C.E., McNamara, G., Wiseman, R.M. and Arrfelt, M. (2008), “Moving closer to the action: examining compensation design effects on firm risk”, Organization Science, Vol. 19 No. 4, pp. 548-566.
28. Deya-Tortella, B., Gomez-Mejia, L., De Castro, J. and Wiseman, R.M. (2005), “Incentive alignment or perverse incentives? A behavioral view of stock options”, Management Research, Vol. 3 No. 2, pp. 109-120.
29. Fama, E.F. (1980), “Agency problems and the theory of the firm”, Journal of Political Economy, Vol. 88 No. 2, pp. 288-307.
30. Fama, E.F. and Jensen, M.C. (1983), “Agency problems and residual claims”, Journal of Law and Economics, Vol. 26 No. 2, pp. 327-349.
31. Fong, E., Misangyi, V. and Tosi, H. (2010), “The effect of CEO pay deviations on CEO withdrawal, firm size, and firm profits”, Strategic Management Journal, Vol. 31 No. 6, pp. 629-651.
32. Fulmer, I.S. (2009), “The elephant in the room: labor market influences on CEO compensation”, Personnel Psychology, Vol. 62 No. 4, pp. 659-695.
33. Gabaix, X. (2008), “Power laws in economics and finance”, Annual Review of Economics, Vol. 1 No. 1, pp. 255-294.
34. Gabaix, X. and Landier, A. (2008), “Why has CEO pay increased so much?”, The Quarterly Journal of Economics, Vol. 123 No. 1, pp. 49-100.
35. Gabaix, X., Landier, A. and Sauvagnat, J. (2014), “CEO pay and firm size: an update after the crisis”, The Economic Journal, Vol. 124 No. 574, pp. F40-F59.
36. Gao, H. (2010), “Optimal compensation contracts when managers can hedge”, Journal of Financial Economics, Vol. 97 No. 2, pp. 218-238.
37. Goergen, M. and Renneboog, L. (2011), “Managerial compensation”, Journal of Corporate Finance, Vol. 17 No. 4, pp. 1068-1077.
38. Gomez-Mejia, L.R. (1994), “Executive compensation: a reassessment and future research agenda”, In Ferris, G. R. (Ed.), Research in Personnel and Human Resource Management, vol. 12, pp. 161-222, JAI Press, Greenwich, CT.
39. Gomez-Mejia, L.R., Berrone, P. and Franco-Santos, M. (2010), Compensation and Organizational Performance, M.E. Sharpe, Armonk, NY.
40. Gomez-Mejia, L.R., Larraza-Kintana, M. and Makri, M. (2003), “The determinants of executive compensation in family controlled firms”, Academy of Management Journal, Vol. 46 No. 2, pp. 226-237.
41. Gomez-Mejia, L.R., Nunez-Nickel, M. and Gutierrez, I. (2001), “The role of family ties in agency contracts”, Academy of Management Journal, Vol. 44 No. 1, pp. 1-15.
42. Gomez-Mejia, L.R., Tosi, H. and Hinkin, T. (1987), “Managerial control, performance, and executive compensation”, Academy of Management Journal, Vol. 30 No. 1, pp. 51-70.
43. Gomez-Mejia, L.R. and Wiseman, R. (1997), “Reframing executive compensation: an assessment and outlook”, Journal of Management, Vol. 23 No. 3, pp. 291-374.
44. Hall, B.J. and Murphy, K.J. (2003), “The trouble with stock options”, NBER working paper no. 9784, National Bureau of Economic Research, Cambridge, MA.
45. Hambrick, D. and Finkelstein, S. (1987), “Managerial discretion: a bridge between polar views of organizational outcomes”, In Cummings, L. L. and Staw, B.M. (Eds), Research in Organizational Behavior, Vol. 9: 369-406, JAI Press, Greenwich, CT.
46. Hambrick, D.C. and Quigley, T.J. (2014), “Toward more accurate contextualization of the CEO effect on firm performance”, Strategic Management Journal, Vol. 35 No. 4, pp. 473-491.
47. He, J. and Huang, Z. (2011), “Board informal hierarchy and firm performance: exploring a tacit structure guiding boardroom interactions”, Academy of Management Journal, Vol. 54 No. 6, pp. 1119-1139.
48. Healy, P.M. and Wahlen, J.M. (1999), “A review of the earnings management literature and its implications for standard setting”, Accounting Horizons, Vol. 13 No. 4, pp. 365-383.
49. Hill, B.M. (1975), “A simple general approach to inference about the tail of a distribution”, The Annals of Statistics, Vol. 3 No. 5, pp. 1163-1174.
50. Holmstrom, B. (1979), “Moral hazard and observability”, Bell Journal of Economics, Vol. 10 No. 1, pp. 74-91.
51. Humphrey, S.E., Nahrgang, J.D. and Morgeson, F.P. (2007), “Integrating motivational, social, and contextual work design features: a meta-analytic summary and theoretical extension of the work design literature”, Journal of Applied Psychology, Vol. 92 No. 5, pp. 1332-1356.
52. Hunter, J.E., Schmidt, F.L. and Judiesch, M.K. (1990), “Individual differences in output variability as a function of job complexity”, Journal of Applied Psychology, Vol. 75 No. 1, pp. 28-42.
53. Jensen, M.C. (2004), “The agency cost of overvalued equity and the current state of corporate finance”, European Financial Management, Vol. 10 No. 4, pp. 549-565.
54. Jensen, M.C. and Meckling, W.H. (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 305-360.
55. Jensen, M.C. and Murphy, K.J. (1990), “Performance pay and top-management incentives”, Journal of Political Economy, Vol. 98 No. 2, pp. 225-264.
56. Kaplan, S.N. (2008a), “Are US CEOs overpaid?”, Academy of Management Perspectives, Vol. 22 No. 2, pp. 5-20.
57. Kaplan, S.N. (2008b), “Are US CEOs overpaid? A response to Bogle and Walsh”, Academy of Management Perspectives, Vol. 22 No. 3, pp. 28-34.
58. Kohn, M.L. and Schooler, C. (1983), Work and Personality: An Inquiry into the Impact of Social Stratification, Ablex Publishing Corporation, Norwood, NJ.
59. Kolev, K., Wiseman, R.M. and Gomez-Mejia, L.R. (2017), “Do CEOs ever lose? Fairness perspective on the allocation of residuals between CEOs and shareholders”, Journal of Management, Vol. 43 No. 2, pp. 610-637.
60. Larraza-Kintana, M., Gomez-Mejia, L.R. and Wiseman, R.M. (2011), “Compensation framing and the risk-taking behavior of the CEO: testing the influence of alternative reference points”, Management Research: Journal of the Iberoamerican Academy of Management, Vol. 9 No. 1, pp. 32-55.
61. Mackey, A. (2008), “The effect of CEOs on firm performance”, Strategic Management Journal, Vol. 29 No. 12, pp. 1357-1367.
62. Maillart, T. and Sornette, D. (2010), “Heavy-tailed distribution of cyber-risks”, The European Physical Journal B-Condensed Matter and Complex Systems, Vol. 75 No. 3, pp. 357-364.
63. Martin, G.P., Gomez-Mejia, L.R. and Wiseman, R.M. (2013), “Executive stock options as mixed gambles: revisiting the behavioral agency model”, Academy of Management Journal, Vol. 56 No. 2, pp. 451-472.
64. Martin, G., Gözübüyük, R. and Becerra, M. (2015a), “Interlocks and firm performance: the role of uncertainty in directorate interlock-performance relationship”, Strategic Management Journal, Vol. 36 No. 2, pp. 235-253.
65. Martin, G., Washburn, N., Makri, M. and Gomez-Mejia, L.R. (2015b), “Not all risk taking is equal: the behavioral agency model and CEO’s perception of firm efficacy”, Human Resource Management, Vol. 54 No. 3, pp. 483-498.
66. Massey, F.J. (1951), “The kolmogorov-smirnov test for goodness of fit”, Journal of the American Statistical Association, Vol. 46 No. 253, pp. 68-78.
67. Miller, J.S., Wiseman, R. and Gomez-Mejia, L.R. (2002), “The fit between CEO compensation design and firm risk”, Academy of Management Journal, Vol. 45 No. 4, pp. 745-756.
68. Murphy, K.J. (1986), “Top executives are worth every nickel they get”, Harvard Business Review, Vol. 64 No. 2, pp. 125-132.
69. Murphy, K.J. (1999), “Executive compensation”, In Ashenfelter, O.C. and Card, D. (Eds), Handbook of Labor Economics, Elsevier/North-Holland, Amsterdam, Vol. 3B, pp. 2485-2563.
70. Nyberg, A.J., Fulmer, I.S., Gerhart, B. and Carpenter, M.A. (2010), “Agency theory revisited: CEO returns and shareholder interest alignment”, Academy of Management Journal, Vol. 53 No. 5, pp. 1029-1049.
71. Palia, D. (2000), “The impact of regulation on CEO labor markets”, The RAND Journal of Economics, Vol. 31 No. 1, pp. 165-179.
72. Pareto, V. (1897), Cours D’économie Politique, Macmillan, London.
73. Sánchez Marín, G. and Aragón Sánchez, A. (2003), “Top managers’ compensation, strategic orientations, and firm performance: empirical evidence from Spanish firms”, Management Research: Journal of the Iberoamerican Academy of Management, Vol. 1 No. 1, pp. 27-44.
74. Sanders, W.G. and Hambrick, D.C. (2007), “Swinging for the fences: the effects of CEO stock options on company risk taking and performance”, Academy of Management Journal, Vol. 50 No. 5, pp. 1055-1078.
75. Scandura, T.A. and Williams, E.A. (2000), “Research methodology in management: current practices, trends, and implications for future research”, Academy of Management Journal, Vol. 43 No. 6, pp. 1248-1264.
76. Seo, J., Gamache, D.L., Devers, C.E. and Carpenter, M.A. (2015), “The role of CEO relative standing in acquisition behavior and CEO pay”, Strategic Management Journal, Vol. 36 No. 12, pp. 1877-1894.
77. Shaw, J.D. (2014), “Pay dispersion”, Annual Review of Organizational Psychology and Organizational Behavior, Vol. 1, pp. 521-544.
78. Shaw, J.D. (2015), “Pay dispersion, sorting, and organizational performance”, Academy of Management Discoveries, Vol. 1 No. 2, pp. 165-179.
79. Tosi, H.L. and Gomez-Mejia, L.R. (1989), “The decoupling of CEO pay and performance: an agency theory perspective”, Administrative Science Quarterly, Vol. 34 No. 2, pp. 169-189.
80. Tosi, H.L. and Gomez-Mejia, L.R. (1994), “CEO monitoring and firm performance”, Academy of Management Journal, Vol. 37 No. 4, pp. 1002-1016.
81. Tosi, H.L., Werner, S., Katz, J.P. and Gomez-Mejia, L.R. (2000), “How much does performance matter? A Meta-analysis of CEO pay studies”, Journal of Management, Vol. 26 No. 2, pp. 301-339.
82. Vancouver, J.B., Li, X., Weinhardt, J., Purl, J. and Steel, P. (2016), “Using a computational model to understand possible sources of skews in distributions of job performance”, Personnel Psychology, Vol. 69 No. 4, pp. 931-974.
83. Walsh, J.P. (2008), “CEO compensation and the responsibilities of the business scholar to society”, Academy of Management Perspectives, Vol. 22 No. 2, pp. 26-33.
84. Wiklund, J. and Shepherd, D.A. (2011), “Where to from here? EO-as-experimentation, failure, and distribution of outcomes”, Entrepreneurship Theory and Practice, Vol. 35 No. 5, pp. 925-946.
85. Wowak, A., Gomez-mejia, L. and Steinbach, A. (2017), “Inducements and motives at the top: a holistic perspective on the drivers of executive behavior”, Academy of Management Annals, Vol. 11 No. 2, pp. 669-702.
86. Zona, F., Gomez-Mejia, L.R. and Withers, M. (2017), “Board interlocks and firm performance: toward a combined agency-resource dependence perspective”, Journal of Management, Vol. 44 No. 2, pp. 589-618.
87. O’Boyle, E.H. and Aguinis, H. (2012), “The best and the rest: revisiting the norm of normality of individual performance”, Personnel Psychology, Vol. 65 No. 1, pp. 79-119.