Undermining incentives: CEO reactions to compensation rebalancing

Directors commonly “punish” CEOs for overly risky behavior by rebalancing their compensation to include more restricted stock and fewer stock options. This paper extends the behavioral-agency model to describe how CEOs will manage their holdings of stock and stock options in response to this form of compensation rebalancing. In doing so, it finds that CEOs respond by selling existing stock holdings and accumulating option holdings. This behavior achieves the opposite incentive structure that such rebalancing intends to create, raising questions about the effectiveness of compensation rebalancing in reducing risky decision making.     

The impact of CEO turnover on firm performance around interim successions

Prior research reports that financial performance of firms that hire interim CEO successors is worse following interim CEO appointments than those that hire permanent successors. We find that this underperformance occurs only following voluntary turnover interim appointments, which represent a small fraction of all voluntary turnovers and roughly a quarter of all interim appointments. We do not observe poor performance when boards hire interim successors following instances of forced departure. Further analysis shows that poor performance during voluntary turnover interim successions are limited to using operating performance measures; market performance is not significantly worse following interim successions. Our results indicate that many interim appointments should not be viewed as value decreasing endeavors and future research on post-succession financial performance should consider the circumstances surrounding the turnover of the predecessor.     

The cost of CEO duality: Evidence from French leadership compensation

This paper aims to provide a detailed analysis of the relationship between board leadership structures and executive compensation. According to agency theory, the combined position of CEO and Chairperson of the Board (COB) entails greater compensation for the CEO in order to reduce conflicts of interest. In the literature, combined board structure is generally considered to generate additional costs for companies. However, the choice of two separate structures implies the payment of incentive compensation for the COB in addition to that defined for the CEO. This paper investigates the financial cost of duality when compensation packages are set for both leaders. Our results suggest that although combined board structure is associated with higher incentive compensation for the CEO, the overall compensation cost to the company is no higher when the chairperson's compensation is considered.     

Executive compensation in banks: insights from CEO equity incentives and securitization transactions

This paper investigates whether CEO equity incentives promote risk-taking activities in the financial industry. Prior research shows that, during the recent credit crisis, banks whose CEOs had high equity incentives performed significantly worse than banks whose CEOs had low equity incentives. A possible explanation for this result is that the incentive to boost stock price induced CEOs to take risks that turned out to be extremely costly. Focusing on securitization transactions that were among the fundamental causes of the financial crisis and using a sample of US financial institutions, the paper provides evidence that banks whose CEOs had high equity incentives engaged in securitization transactions to a greater extent than did financial institutions guided by CEOs with low equity incentives. Moreover, the paper shows that CEOs with high equity incentives securitized riskier loans than did CEOs with low incentives. This study helps to clarify the role of equity-based compensation in promoting risk-taking behaviors in banks.     

Agency conflicts,executive compensation regulations and CEO pay-performance sensitivity: evidence from Sweden

Based on a unique country set up with concentrated ownership of firms, strong representation of major shareholders on boards and one of the highest percentages of firms with dual-class shares worldwide I study CEO pay-performance sensitivity in Swedish listed firms in the years 2001–2013. Focusing on Type II agency conflict, I find that that pay-performance sensitivity in family-controlled firms with family CEOs is significantly lower than in other types of firms, and that dual-class firms have significantly lower sensitivity of pay to accounting performance than non-dual-class firms. The results suggest that in firms with type II agency conflicts compensation practices may be driven either by family ties or by the power preferences of the controlling shareholder that uses compensation to align CEO’s interest with his/her will rather than with financial performance. The study also documents that the link between CEO pay and performance disappears in the 2010–2013 period following the implementation of the European Recommendations regarding executive compensation. This finding is in contrast to the stipulated goal of the European Commission, ‘to ensure pay for performance’ (European Commission 2009).     

CEO duality and firm performance: The moderating roles of other executives and blockholding outside directors

This study examines how the effect of CEO duality on firm performance is affected by two internal governance forces – namely other executives in the top management team and blockholding outside directors. Results based on a longitudinal dataset from the U.S. computer industry were consistent with my hypotheses. Specifically, I found that the effect of CEO duality was negative when the CEO had dominant power relative to other executives and when the board had a blockholding outside director, but was nonsignificant otherwise. This study enriches our understanding of the effect of CEO duality, and helps reinforce the call for the nonduality structure as the default choice and put the burden of proof on those who wish to justify otherwise on special grounds.     

CEO compensation and firm competitive behavior: Empirical evidence from the U.S. pharmaceutical industry

Executive compensation is one of the most critically evaluated aspects of a firm. Driving this attention is the debate into what exactly are the consequences of executive pay. Since a majority of prior compensation research has aggregated industries into a single omnibus sample, it has been difficult to detect compensation effects that are likely industry specific. Accordingly, we focus on a high technology industry and examine how CEO incentive compensation affects firm competitive behavior. Utilizing a sample of U.S. pharmaceutical firms, we find that both short- and long-term incentives of a CEO are positively related to firm competitive aggressiveness. Moreover, our results show a positive relationship between long-term incentives of the top executive and the diversity of competitive moves undertaken by the firm. This study contributes to technology management, compensation, and strategy literatures and generates interesting possibilities for future research.     

Thinking outside the box by looking inside the box: Extending the cognitive revolution in leadership research

Follower and leader cognitions play critical roles in many organizational phenomena. In this review, we report and reflect on a decade of cognitive leadership research. Following a brief introduction, the review is divided into two sections—one devoted to individual and dyadic cognition, and the other to collective cognition. We identified three central themes for each section. For individual and dyadic cognition, we identified metacognitive processes and leadership, implicit leadership theories (ILTs), and network based models of ILTs as central themes. For collective cognition, we identified charisma, organizational performance and sensemaking, and transformation and change as central themes. Our goal in this review was to uncover important underlying assumptions of selected studies to illuminate more clearly the path of cognitive leadership research over the past 10 years and its potential paths over the next ten years.     

The configurational effects of board monitoring and the institutional environment on CEO compensation: a country-level fuzzy-set analysis

This study examines the causal complexity of how the effectiveness of board monitoring influences CEO compensation around the world. Previous research drawing from the managerial power theory and ‘increased career risks’ perspective offer alternative arguments for how low and high levels of effective monitoring by boards of directors influence CEO compensation. Adopting a configurational approach using fuzzy-set qualitative comparative analysis, we explore the idea that there are multiple causal paths leading to high levels of CEO compensation, such that theoretical logic from both theories may be relevant contingent upon the institutional environment in which the relationship is embedded. Our findings in a sample of 38 countries suggest that high CEO compensation is an outcome of both the presence and absence of effective board monitoring depending upon how it combines with minority investor protections and the cultural dimensions of power distance, uncertainty avoidance, and individualism, as well as the overall stock market value. Specifically, in countries with high levels of effective board monitoring, high CEO compensation will be more likely when the country’s culture is high in uncertainty avoidance, low in power distance and when there are strong protections for minority investors. Whereas in countries with low levels of effective board monitoring, high CEO compensation will be more likely when power distance is high and uncertainty avoidance is low and when there are weak protections for minority investors. Our country-level study highlights the theoretical strengths of employing a configurational approach to explore the complex interrelationships of governance mechanisms and the contexts in which they manifest.     

CEO humility,narcissism and firm innovation: A paradox perspective on CEO traits

We examine how two seemingly contradictory yet potentially complementary CEO traits—humility and narcissism—interact to affect firm innovation. We adopt a paradox perspective and propose that individuals can have paradoxical traits and that, in particular, humility and narcissism can coexist harmoniously, especially among the Chinese, whose philosophical tradition embraces paradoxical thinking and behaving. CEOs that are both humble and narcissistic are hypothesized to be more likely to have socialized charisma, to cultivate an innovative culture, and to deliver innovative performance. Two studies using multisource data involving 63 CEOs, 328 top managers, and 645 middle managers in Study 1 and 143 CEOs and 190 top managers in Study 2 support the hypotheses and point to new directions for studying CEO traits and their effects on firm outcomes.     

CEO self-discipline in power use: A key moderator for the effect of CEO power

The effect of CEO power depends ultimately on how it is used (i.e., a CEO’s approach to power use), which may vary from one CEO to another. Notwithstanding extensive research on the effect of CEO power on organizational outcomes, researchers have thus far paid very limited attention to how the effect depends on individual differences. In this study I propose a new construct of CEO self-discipline in power use—defined as a CEO’s appeared conformance to the prescribed leadership norms (in particular, norms regarding how leaders should use their power)—and examine how it moderates the effect of CEO power. With a longitudinal dataset from the U.S. computer hardware and software industries, I found that CEO self-discipline in power use weakened the positive effect of CEO power on performance extremeness and improved the effect of CEO power on firm performance.     

Does the compensation level of outside director depend on its personal profile? Some evidence from UK

Combining human capital theory and equity theory, we developed and tested a model in which the outside directors’ total cash compensation is related to the outsider’s profile, as well as to the board and firm characteristics. Consistent with our model, characteristics of the outsider’s profile, in terms of his/her role and responsibility, meeting activities and length of service, are relevant. Only the director’s popularity, as a part of his/her human capital, has a significant effect on his/her compensation. Our empirical results confirm the necessity to create a stronger link between the remuneration policies of the outsider directors and their contribution in a board, in terms of human capital. The remuneration policies adopted by firms should be linked to practices on corporate governance useful for helping outsiders contribute confidently to their work of the board and receive ongoing support and information so they can develop their understanding of the total environment within they work. Then, we suggest having recourse to qualifications and professional skills as well as to specific training or board induction programmes defined by firms themselves. Finally, the Combined Code should promote the adoption and spreading of such practices on market.     

Corporate Leadership: Reflections of a CEO and CEO Advisor

This article reviews the careers of five successful CEOs to identify three core ingredients behind the effective management of large corporate groups. From nearly 40 years experience as a CEO and a consultant to CEOs, the author distinguishes culling standards of performance, values and design that motivate people and appropriate and positive growth paths as three ingredients most likely to increase the chances of success for corporate leaders. The paper also analyses two examples of significant failure and suggests modifications to the messages of three leading business academics.     

Power and Pay: The Politics of CEO Compensation

This paper examines CEO compensation, with an emphasis on the power of CEOs to influence their own compensation by managing the compensation process. It analyzes the CEO's power over the board of directors and the political tactics used by the CEO to manage the board and its compensation decisions. An empirical examination of CEO compensation in 203 large American manufacturing firms in 1985 illustrates the effect of CEO power on compensation and the flexibility available to the CEO in establishing the legitimacy of compensation. The implications of this perspective for management control of corporations and for CEO compensation research are considered.     

CEO duality and agency cost: evidence from Bangladesh

This study examines if Chief Executive Officer (CEO) duality reduces the firms’ agency cost in Bangladesh. The agency costs are measured as two efficiency ratios: ‘expense ratio’ and ‘asset utilization ratio’. The finding is that, there is no significant relationship between CEO duality and agency costs. These findings imply that, duality may have given the CEOs enormous powers; it may have reduced the check and balance or board’s ability to exercise the governance (monitoring) function, which is not helpful to enhance firm efficiency. This study contributes to the global debate on CEO duality and provides a new avenue of knowledge on CEO duality and firm efficiency in the context of an emerging economy.     

International experience and CEO selection: An empirical study

This paper extends the upper-echelons theory by examining if observable demographic characteristics can be used to predict CEO selections. Based on an empirical analysis of recent successions at USA Fortune 200 companies, it identifies international experience as an important construct associated with accession to the CEO position of large corporations. The study also finds that CEO international experience is higher in firms that are highly international in terms of sales and assets. Firm and individual control variables are discussed and included in the empirical analysis. Managerial implications and suggestions for related future research are provided.     

Increasing productivity in global firms: The CEO challenge

In a highly competitive environment global firms face the challenge of increasing productivity to compete with firms sourcing production in low-wage developing countries. This paper presents a new paradigm of production which provides a solution to the productivity challenge. The new paradigm is both a philosophy of management and a set of methods that draw upon the experiences of firms employing quality management and lean production. This approach has proven to yield substantial gains in quality, productivity, and competitiveness. The methods and the requirements to successfully implement it are discussed. How to transplant these systems to developing countries is also considered. The role of the CEO in successful implementation of the New Productivity Paradigm is discussed in the final section.     

A juggling act: CEO polychronicity and firm innovation

This study examines a unique CEO temporal characteristic—polychronicity (the extent to which CEOs prefer to engage in multiple projects simultaneously and believe that this is the best way of doing things). I propose that CEO polychronicity is a double-edged sword for firm innovation and that this relationship is contingent on the environmental and organizational contexts. Specifically, CEO polychronicity is positively related to firm innovation when firms operate in more dynamic environments, are relatively large and have poor past performance, but is negatively related to firm innovation when firms operate in less dynamic environments, are relatively small and have good past performance. Results based on survey data from 111 Chinese small and medium-sized enterprises (SMEs) largely support my hypotheses. This study makes contributions by being an initial attempt to examine CEO polychronicity and by identifying essential boundary conditions of the effect of CEO polychronicity on firm innovation.     

CEO characteristics and firm valuation: a quantile regression analysis

This study investigates the effects of three highly-visible CEO characteristics on firm valuation. Using a sample of 2702 observations for Australian firms over the period 2001–2011, we find that CEO age is uniformly associated with lower firm valuation. CEO tenure is also associated with lower valuation, but more significantly so in the higher quantiles of firm valuation, that is for firms with high-growth opportunities. In contrast, CEO duality is found to be beneficial only for firms with high-growth opportunities. Overall, the study highlights the contingent relationship between CEO characteristics and firm valuation.