A Literature Review of the Perspectives of CEO Pay: An Analysis of Issues and Controversies

Faitira Manuere, Precious Hove

Abstract


The purpose of this paper is to review the literature on various theories that are used in organisations today to determine executive compensation. This paper analyses the relevance of the theories that are used to determine CEO compensation in modern corporations. The paper makes an attempt to review extensively the literature on CEO compensation. This paper looks at the concerns of sixteen theories of executive compensation. This paper further analyses the special features that are associated with CEO pay. These features help us to understand the problems that experts on executive pay experience when they try to define the exact CEO pay when compared to other rewards that are non financial. The drivers of executive pay are quantified and qualified in order to provide the conceptual background needed to understand the core factors that determine executive pay. Therefore the role of institutional investors in driving managerial salary is explored in detail. Finally, the effects of firm size and good corporate governance on executive pay are carefully analysed.


Full Text:

PDF

References


Aggarwal, R. K., & Samwick, A. A. (1999). The other side of the trade-off :the impact of risk on executive compensation. Journal of Political Economy, 10(7), 65-105. https://doi.org/10.1086/250051

Aguilera, R. V., & Jackson, G. (2003). The Cross-National Diversity of Corporate Governance: Dimensions and Determinants. The Academy of Management Review. 28(3), 447-465. https://doi.org/10.5465/amr.2003.10196772

Antle, R., & Smith, A. (1985). Measuring executive compensation: Methods and an application', Journal of Accounting Research, 23(4), 296-325. https://doi.org/10.2307/2490920

Balsam, S. ( 2002). An Introduction to Executive Compensation. San Diego: Academic Press.

Balsam, S. (2002). An Introduction to Executive Compensation. Sam Diego: Academic Press.

Barkema, H. G., & Gomez-Mejia, L. R. (1998). Managerial Compensation and Firm Performance: A General Research Framework. Academy of Managemen Journal, 41(2), 135-145. https://doi.org/10.2307/257098

Berkema, H. G., & Gomez-Mejia, L. R. (1998). Managerial Compensation and Firm Performance: A General Research Framework. Academy of Management Journal, 41(2), 135-145. https://doi.org/10.2307/257098

Boyd, B. K. (1994). Board Control and CEO Compensation. Strategic Management Journal, 15(5), 335-344. https://doi.org/10.1002/smj.4250150502

Brick, I., Palmon, O., & Wald, J. (2005). CEO compensation, director compensation, and firm performance: evidence of cronyism? Journal of Corporate Finance, 12, 403– 423. https://doi.org/10.1016/j.jcorpfin.2005.08.005

Cicsel, D., & Carrol, T. (1980). The determinants of executive salaries: An econometric survey. Review of Economics and Statistics, 7(62), 7-13.

Combs, J. G., & Skill, M. S. (2003). Managerialist and Human Capital Explanations for Key Executive Pay Premiums: A Contingency Perspective. The Academy of Management Journal, 1(3), 76 -98.

Core, J. E., Holthausen, R. W., & Larcker, D. F. (1999). Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics, 51(3), 371-406. https://doi.org/10.1016/S0304-405X(98)00058-0

Crystal, G. (1991). In search of excess: The overcompensation of American executives. W.W. Norton and Company, New York.

Donaldson, L., & Davis, J. H. (1991). Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns. Australian Journal of Management, 16(1), 49-64. https://doi.org/10.1177/031289629101600103

Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(3), 57–74. https://doi.org/10.5465/amr.1989.4279003

Finkelstein, S., & Boyd, B. K. (1998). How much does the CEO matter? The Role of Managerial Discretion in the Setting of CEO. Compensation. The Academy of Management Journal, 41(2), 179-199.

Finkelstein, S., & Hambrick, D. C. (1988). Chief executive Compensation: A synthesis and reconciliation. Strategic Management Journal, 9(6), 543-558. https://doi.org/10.1002/smj.4250090603

Frank, R. H. (1984). Are workers paid their marginal products?: American Economic Review, (74), 549-571.

Frey, B. S. (1997). On the relationship between intrinsic and extrinsic work motivation. International Journal of Industrial Organisation, 15(4), 427-439. https://doi.org/10.1016/S0167-7187(96)01028-4

Frydman, C., & Jenter, D. (2010). CEO Compensation, National Bureau of Economic Research Working Paper Series.

Gomez-Mejia, L. R. (1994). Executive Compensation: A Reassessment and a Future Research Agenda. Research in Personnel and Human Resources Management, 12(3), 161-222.

Gomez-Mejia, L. R., & Wiseman, R, M. (1997). Reframing Executive Compensations: An Assessment and Outlook. Journal of Management, 23(3), 291-374. https://doi.org/10.1016/S0149-2063(97)90035-0

Goodman, P. S. (1974). An examination of Referents used in the Evaluation of Pay. Organisational Behaviour and Human Performance, 12(3), 170-195. https://doi.org/10.1016/0030-5073(74)90045-2

Greenberg, J. (1986). Determinants of Perceived Fairness of Performance Evaluations. Journal of Applied Psychology, 71(2), 340-342. https://doi.org/10.1037/0021-9010.71.2.340

Hartzell, J. C., & Starks, L. T. (2005). Institutional investors and executive compensation. The Journal of Finance, 58(6), 2351-2374. https://doi.org/10.1046/j.1540-6261.2003.00608.x

James, P. C. (2014). A Review of the Current Literature on Executive Compensation, New Insights and Understandings. Journal of Economics and Financial Studies, 03(02), 45-54. https://doi.org/10.18533/jefs.v2i02.134

Jensen, C. M., & Meckling, H. W. (1976). Theory of the firm: managerial behaviour agency costs, an ownership structure. Journal of Financial Economics, 3(9), 360-395. https://doi.org/10.1016/0304-405X(76)90026-X

Jensen, C. M., & Murphy, J. K. (1990). CEO incentives- It’s not how much you pay, but how. Havard Business Review, 3(7), 138-153. https://doi.org/10.1111/j.1745-6622.1990.tb00207.x

Jensen, M. (1993). The modern industrial revolution, exit, and the failure of internal control systems. Journal of Finance, 3(48), 831-880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x

Jensen, M., & Murphy, K., (2004). Performance pay and top-management incentives. The Journal of Political Economy, 8(2), 34-55.

Jenson, M. C., & Murphy, K. J. (2004). Remuneration: Where we have been, How we got to Here, What are the Problems, and How to Fix Them? ECGI Working Paper 44/2004.

Kaplan, S. N. (1990). Top Executive Rewards and Firm Performance: a Comparison of Japan and the United States. The Journal of Political Economy, 102(3), 510- 546. https://doi.org/10.1086/261944

Kay, N. (2000). Searching for the Firm: The Role of Decision in the Economics Organisations. Industrial and Corporate Change, 9(4), 683-707. https://doi.org/10.1093/icc/9.4.683

Kidder, D. L., & Buchholtz, K. (2002). Can Excess Bring Success? CEO Compensation and the Psychological Contract. Human Resources Management Review, 12(4), 599-617. https://doi.org/10.1016/S1053-4822(02)00071-2

Kim, I., & Tucker, C. M., (2014). What drives CEO pay in the U.S.?: An empirical study of companies in the consumer staples sector. Paper presented at the PPBR conference, California, U.S.A.

Lambert, R. A., Larcker, D. F., & Verrecchia, R. E. (1993). Portfolio considerations in valuing executive compensation. Journal of Accounting Research, 29(1), 129-149. https://doi.org/10.2307/2491032

Lazear, E. P., & Rosen, S. (1981). Rank-Order Tournaments as Optimum Labour Contracts. The Journal of Political Economy, 89(5), 841-864. https://doi.org/10.1086/261010

Murphy, K. J. (1999). Chapter 38 Executive Compensation. In C.A. Orley and C. David (EDs). Handbook of Labour Economics, 3, 2485-2563. https://doi.org/10.1016/S1573-4463(99)30024-9

O’Reilly, C. A., Main, B. G., & Crystal, G. S. (1988). CEO-Compensation as Tournament and Social Comparison: a Tale of Two Theories. Administrative Science Quarterly, 2(4), 23-47.

Ozkan, N. (2007). Do corporate governance mechanisms influence CEO compensation? An empirical investigation of UK companies. Journal of Multinational Financial Management, 17(5), 349-364. https://doi.org/10.1016/j.mulfin.2006.08.002

Parijat, P., & Bagga, S. (2014). Victor Vroom’s Expectancy Theory of Motivation – An Evaluation. International Research Journal of Business and Management, 7(9), 1- 8.

Prendergast, C. (1999). The consequences and issues of executive pay. Journal of Economic Literature, 37(1), 7-63. https://doi.org/10.1257/jel.37.1.7

Roberts, D. R. (1956). A General Theory of Executive Compensation Based on Statistically Tested Proposition. Quarterly Journal of Economics, 70(2), 270- 294. https://doi.org/10.2307/1884268

Roe, M. J. (2003). Political Determinants of Corporate Governance: Political Context, Corporate Impact. Oxford: Oxford Press.

Rosen, S. (1981). Contracts and the market for executives. In L. Werin and H. Wijkander (Eds.), Contract Economics, Oxford: Blackwell, pp. 181-211.

Rosenstein, S., Jeffrey, G., & Wyatt, C. (1990). Outside Directors, Board Independence, and Shareholder Wealth. Journal of Financial Economics, 26(2), 175-91. https://doi.org/10.1016/0304-405X(90)90002-H

Shah, S. et al (2009), Determinants of CEO compensation. Empirical evidence from Pakistan listed companies. International research Journal of finance and economies, 32(12), 149-159.

Shleifer, A., & Vishny, R. W. (1986). Large shareholder and corporate control. Journal of Political Economy, (94), 461-488. https://doi.org/10.1086/261385

Simon, H. A. (1957). The Compensation of Executives. Sociometry, 20(1), 32-35. https://doi.org/10.2307/2786111

Thomas, R. S. (2002). Explaining The International CEO Pay Gap: Board Capture or Market Driven?: Vanderbilt University Law School, Law and Economics Working Paper 02-19.

Tosi, H. L. (2000). How much does performance matter? A-Meta- analysis of CEO pays studies. Journal of management, 26(2), 301 339. https://doi.org/10.1177/014920630002600207

Ungson, G. R., & Steers, R. M. (1984). Motivation and politics in Executive Compensation. The Academy of Management Review, 9(2), 313-323. https://doi.org/10.5465/amr.1984.4277666

Zhou, X. (2000). CEO pay, firm size, and corporate performance: evidence from Canada. Canadian Journal of Economics, 33, 213–252. https://doi.org/10.1111/0008-4085.00013

Zingales, L. (1998). Corporate Governance. In P. Newman (Ed). The New Palgrave Dictionary of Economics and the Law. New York: Palgrave MacMillan, Basingstoke. https://doi.org/10.2139/ssrn.46906

Zingales, L. (1998). Corporate Governance. In P. Newman (Ed.), The New Palgrave Dictionary of Economics and the Law. New York: Palgrave MacMillan, Basingstoke. https://doi.org/10.2139/ssrn.46906




DOI: https://doi.org/10.5296/jpag.v8i4.13817

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Journal of Public Administration and Governance  ISSN 2161-7104

Copyright © Macrothink Institute

'Macrothink Institute' is a trademark of Macrothink Institute, Inc.

To make sure that you can receive messages from us, please add the 'macrothink.org' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.