International Developments in Executive Compensation
Address for correspondence: Brian K. Boyd Department of Management, College of Business, City University of Hong Kong, Hong Kong. E-mail: email@example.com
Executive compensation is a popular topic in both the popular press and the scholarly literature. During each proxy season, a recurring debate occurs regarding whether top executives are over-paid or under-paid, as well as the best approaches to align the interests of top executives with those of the firm, stake-, and shareholders. Such debate has fuelled greater oversight of compensation on a global basis. In the US, for example, the Troubled Asset Relief Program (TARP) recipients must follow strict guidelines regarding the design of compensation packages. Additionally, the US has seen growing diffusion of clawback provisions, which are mechanisms to retroactively reduce the compensation of key executives. The Chinese government has recently placed restrictions on bonus pay for banking executives; and countries such as the UK, Australia, and India have seen calls for curbs on pay to top managers. Comparable examples may be found in a number of other countries.
Academic research on executive compensation mirrors the prominence of this topic within the business community. For example, a search using the term “executive compensation” using ABI Inform yields 24,000 scholarly articles – over 4,000 of these in the last three years alone. Compensation articles are published in a range of disciplines and specialties, including accounting, economics, finance, and management. However, one critique of compensation work to date has been the relative inattention to international aspects of executive compensation (Gomez-Mejia & Wiseman, 1997). The goal of this special issue is to advance knowledge regarding the design and implementation of effective executive compensation packages, including the relevance of different approaches across national and cultural contexts. Additionally, we hope to encourage new research in this area.
We begin our introduction by providing a brief review of internationally themed executive compensation studies to date. We identified seven prominent outlets for publishing compensation studies, and then conducted a content analysis of all empirical papers in these journals, which had an international focus. This review covered the period 1991–2011.1 We briefly summarize norms and trends for international executive compensation studies over the last two decades. Next, this special issue presents both conceptual and empirical studies that address international aspects of executive pay. We provide brief descriptions of each of the articles included in this issue. Finally, we offer some general suggestions for future research.
Content Analysis of Prior Internationally Focused Compensation Studies
As a complement to the original articles published in our special issue, we conducted a content analysis of prior studies of executive compensation that had an international focus. Our intent is that a summary of these papers, combined with the papers in the special issue, will help to both encourage and direct future work in this area.
Since executive compensation is an interdisciplinary topic, we decided to sample a set of representative journals from four disciplines: accounting, finance, economics, and management. We began by identifying leading journals in each discipline, using ISI impact factors reported in the 2010 Journal Citation Report Social Science Edition. Our journal list included Journal of Accounting Research, Review of Financial Studies, Journal of Political Economy, American Economic Review, Academy of Management Journal, and Strategic Management Journal. We also included Corporate Governance: An International Review, given its strong interdisciplinary and international focus. We then ran electronic searches for a number of journals in each discipline, using both ABI Inform, and databases available from various journal publishers. Our time frame covered articles published between 1991 and 2011. The search identified articles where any of the terms “executive compensation”, “CEO compensation”, “director compensation”, or “board compensation” appeared in the full text of the article. Next, we manually reviewed each article, identifying those papers that were empirical and studied some aspect of executive compensation. We excluded articles that were purely descriptive in nature (e.g., simple reporting of compensation levels or practices), as well as studies that addressed compensation only indirectly (e.g., determinants of compensation committee structure). We classified papers as “internationally themed” if at least some portion of the data used in the study came from directors or executives in non-US firms. We also included studies that collected data from multiple hierarchical levels, if the CEO or other top executives were included in the sample. We excluded conceptual, meta-analyses and laboratory studies from our analysis.
In Table 1, we provide descriptive information on the results of our search. As shown in the table, there are a number of interesting findings. First, with the exception of CGIR, there is a notable paucity of internationally themed studies of executive pay: Even when combined, the six other journals (i.e., AMJ, SMJ, AER, JPE, RFS, and JAR) yielded only 19 international executive compensation studies over the 20-year span of our analysis. Second, there are broad differences in the prevalence of international compensation studies, across both journals and disciplines. For example, in the management discipline, approximately one in five (22.2 percent) compensation studies published in SMJ had a non-US sample. In contrast, only 12.2 percent of compensation studies published in AMJ had an international focus. Similarly, economics journals also reported very different patterns: There were no international compensation studies found in our sample of AER articles, but 16.7 percent of the compensation papers published in JPE had an international focus. Journal of Accounting Research published proportionately very few international compensation studies. In comparison, 71 percent of the compensation studies published in CGIR were international. Additionally, over half of the international compensation studies that we identified came from CGIR. While our sample is by no means exhaustive, it is clearly representative of influential journals that publish compensation studies. Consequently, one conclusion of our analysis is that international executive compensation research is a nascent research stream.
Table 1. Distribution of International Compensation Studies
|Academy of Management Journal||Management||5.20||57||7||12.2%|
|American Economic Review||Economics||3.10||5||0||0%|
|Corporate Governance: An International Review||Cross-discipline||2.75||38||27||71.0%|
|Journal of Accounting Research||Accounting||3.30||32||1||3.1%|
|Journal of Political Economy||Economics||4.10||6||1||16.7%|
|Review of Financial Studies||Finance||4.60||22||1||4.5%|
|Strategic Management Journal||Management||3.60||41||9||22.0%|
In Table 2, we summarize the pool of international compensation studies found in our content analysis. In broad terms, the most prominent characteristic of these articles is their variability. The topics addressed, use of compensation as a predictor vs. outcome variable, the types of executives sampled, and the regions used for data collection all differed widely from paper to paper. The distribution of samples by geography is shown in Table 3. There is a strong bias toward Anglo-Saxon nations, with many samples coming from the UK, Canada, or Australia. The remaining studies sampled a smattering of European and Asian nations. Additionally, a number of studies drew on multi-country samples for their analysis. Overall, the choice of geographic segment does not appear to be closely linked to the respective size of the sample economies, as measured by GDP.
Table 2. International Executive Compensation Studies
|Kaplan (1994)||JPE||Comparison of executive compensation and firm performance in two nations||Japan and US|
|Roth and Ricks (1994)||SMJ||Reward system design and goal setting among multinationals||Multi-country|
|Roth and O'Donnell (1996)||AMJ||compensation of foreign subsidiary executives||Multi-country|
|Conyon and Peck (1998)||AMJ||Board monitoring as a determinant of executive pay||UK|
|Ezzamel and Watson (1998)||AMJ||Market comparisons as a determinant of executive pay||UK|
|Izan, Sidhu, and Taylor (1998)||CGIR||Pay and performance||Australia|
|O'Donnell (2000)||SMJ||Monitoring mechanisms and compensation systems in MNC subsidiaries||Multi-country|
|Boyd and Salamin (2001)||SMJ||Managerial discretion and strategic orientation as predictors of compensation mix, for top executives and other hierarchical levels||Switzerland|
|Conyon, Peck, and Sadler (2001)||SMJ||Tournament theory||UK|
|Wen, Rwegasira, and Bilderbeek (2002)||CGIR||Board characteristics and firm capital structure||China|
|Tuschke and Sanders (2003)||SMJ||Adoption of stock-based incentive plans||Germany|
|de Bos and Donker (2004)||CGIR||Governance structure and accounting changes||Netherlands|
|Khanna, Palepu, and Srinivasan (2004)||JAR||Board compensation processes included as an element of overall governance transparency||24 countries|
|Shiwakoti, Ashton, and Keasey (2004)||CGIR||Pay and performance||UK|
|Cheng and Firth (2005)||CGIR||Determinants of executive compensation||Hong Kong|
|De Andres, Azofra, and Lopez (2005)||CGIR||Director compensation and firm valuation||OECD|
|Kubo (2005)||CGIR||Pay and performance||Japan|
|Lin (2005)||CGIR||Agency and stewardship effects on CEO pay||Taiwan|
|Fiss (2006)||SMJ||Compensation of top management ream and board of directors||Germany|
|Fiss and Zajac (2006)||AMJ||Stock options as a predictor of framing of strategic change||Germany|
|Yawson (2006)||CGIR||Director compensation as a predictor of layoff decisions||UK|
|Adjaoud, Zeghal, and Andaleeb (2007)||CGIR||Director compensation, board quality, and firm performance||Canada|
|Doucouliagos, Haman, and Askary (2007)||CGIR||CEO pay, director pay, and firm performance||Australia|
|Drobetz, Pensa, and Schmid (2007)||CGIR||Determinants of executive stock options||Switzerland|
|Farooque, Van Zijl, Dunstan, and Karim (2007)||CGIR||Board compensation as a predictor of firm performance||Bangladesh|
|Lee, Stathopoulos, and Vonatsos (2007)||CGIR||Alternatives to Black Scholes for estimating the value of executive stock options||UK|
|Shekhar and Stapledon (2007)||CGIR||Governance structure of IPO firms||Australia|
|Chizema (2008)||CGIR||Determinants of pay disclosure for executives and board members||Germany|
|Fey and Furu (2008)||SMJ||Incentive pay and knowledge sharing||China|
|Khalil, Magnan, and André (2008)||CGIR||Adoption of stock equity plans for directors||Canada|
|Bodolica and Spraggon (2009)||SMJ||CEO compensation contracts and M&A activity||Canada|
|Brenner and Schwalbach (2009)||CGIR||Director liability and regulations as determinant of executive pay||27 countries|
|Schiehll and Bellavance (2009)||CGIR||Governance factors as a determinant of CEO pay plan design||Canada|
|Zattoni and Minichilli (2009)||CGIR||Determinants of adoption of equity incentive programs||Italy|
|Carpenter, Indro, Miller, and Richards (2010)||CGIR||Relationship between CEO stock options, home country risk, and American Depository Receipt (ADR) status||40 countries|
|Chen, Liu, and Li (2010)||CGIR||CEO duality and shareholdings as predictors of CEO pay||China|
|Chiang and He (2010)||CGIR||Director compensation as a predictor of firm transparency||Taiwan|
|Conyon and Sadler (2010)||CGIR||Effect of “say on pay” legislation on CEO compensation||UK|
|Cruz, Gómez-Mejia, and Becerra (2010)||AMJ||Integration of agency and trust perspectives on the framing of executive contracts||Spain|
|David, O'Brien, Yoshikawa, and Delios (2010)||AMJ||Relationship between diversification and compensation||Japan|
|Shipilov, Greve, and Rowley (2010)||AMJ||Director pensions and loans||Canada|
|Voulgaris, Stathopoulos, and Walker (2010)||CGIR||Effect of compensation consultants on CEO pay||UK|
|Conyon, Core, and Guay (2011)||RFS||Risk as an explanation for pay differentials across top executives in two nations||UK and US|
|Kulich, Trojanowski, Ryan, Haslam, and Renneboog (2011)||SMJ||Gender disparities among board members||UK|
Table 3. Characteristics of Content Analysis Compensation Studies
These studies also spanned a number of theories and topics. While multiple perspectives have been used, including tournament and stewardship theories, the bulk of the articles were framed using agency theory. Popular topics included pay for performance, monitoring and alignment issues, and factors in the design of pay packages. CEOs were the most commonly studied population, while a number of studies also examined directors’ pay. A smaller percentage of studies focused on both CEOs and additional top managers, and a handful of studies examined compensation practices across multiple hierarchical levels.
Roughly 15 years ago, a review identified three prominent limitations of international governance studies at that time (Boyd, Carroll, & Howard, 1996). How does international compensation research today stack up against those limitations? The first concern was a greater emphasis on descriptive analysis vs. theory development and hypothesis testing. Early international governance studies, reflecting the embryonic nature of the area, might often report only norms for board characteristics in different regions, or present descriptive results, such as director surveys. International compensation studies have clearly addressed this limitation, with a strong emphasis on theory development and testing. The second concern was selectivity in the nations studied. Early international governance studies emphasized the UK, Germany, and Japan. Furthermore, “In contrast, other parts of Europe are relatively neglected. Additionally, entire regions – including Latin America and much of the developing world – are excluded entirely. Our findings indicate that virtually nothing is known about governance practices in the regions which will be growing the fastest in the next decades” (Boyd et al., 1996:205). As shown by the geographic breakout in Table 3, only limited progress has been made for international compensation studies: While we have seen multiple studies of China and Taiwan, coverage in other regions is still quite uneven. Additionally, international studies almost always consist of single-country samples. The final limitation was an inconsistency in the choice of variables and topics to be studied. Again, as shown in Table 2, limited progress has been made regarding international compensation studies: For both compensation and governance variables, we see very little commonality across studies, with the exception of pay-for-performance studies.
Articles in the Special Issue
Next, we will summarize each of the articles included in this special issue. The issue begins with two theoretical discussions, followed by empirical studies covering multiple nations. Our first article is “New directions on compensation and upper echelons”, by Geletkanycz and Sanders. While the connection between CEO pay and firm performance is a popular research topic, results have varied substantially across studies. In this commentary, the authors suggest that a stronger focus on upper echelon theory can help to develop a more fine-grained understanding of the strategic role of executive pay. In particular, the authors discuss how compensation can be better understood as a mechanism that works in conjunction with executive characteristics, such as demography, team composition, or skill sets – in order to shape strategic choices and subsequent firm performance.
Our second article is “Has agency theory run its course? Making the theory more flexible to inform the management of reward systems”, by Cuervas-Rodrígues, Gomez-Mejia and Wiseman. Agency theory is the dominant perspective for studying executive pay, a practice reflected in the topics of articles summarized in Table 2. This article is a conceptual discussion of both the strengths and limitations of the agency perspective. The authors begin with a summary of the traditional agency viewpoint. Next, they examine the implications of research streams on trust, stakeholders, and leadership, and their implications for agency predictions. They conclude with suggestions for improving agency studies via the incorporation of contextual factors.
The next article is “Performance sensitivity of executive pay: The role of foreign investors and affiliated directors in Japan”, by Colpan and Yoshikawa. As reported in Tables 2 and 3, there are relatively few compensation studies with non-US samples, and non-US samples also tended to skew towards Anglo-Saxon nations (e.g., United Kingdom, Canada, or Australia). Consequently, there were few studies of Japan among the compensation articles that we reviewed. One explanation for this relative inattention is the difficulty in obtaining executive pay data for Japanese firms. Colpan and Yoshikawa provide an example for proxying compensation data in the face of limited disclosure requirements. Since Japanese boards are primarily comprised of inside directors, they take available data (i.e., total bonus payments to the board divided by board size) to come up with an approximation of compensation for top executives. They develop a model predicting bonus compensation using governance variables, including foreign ownership and different types of director appointments. Additionally, they also develop a number of moderation hypotheses.
As noted in the introduction, much of the public interest in executive pay is generated by news stories questioning the fairness of executive pay practices. This is not a recent phenomenon, as articles about excessive or inappropriate pay practices have been published for decades, spurring pressure for oversight and regulation (e.g., Boyd, 1994). Our next article is “Backdated stock options and boards of directors: An examination of committees, structure, and process”, by Frankforter, Becton, Stanwick, and Coleman. The paper examines the controversial process of allowing the CEO to modify the date of stock option rewards, which increases their potential for personal return while minimizing personal risk within US firms. The authors draw on multiple theoretical perspectives, including upper echelons, agency theory, and decision-making models to predict the likelihood of a firm's engaging in option backdating.
Another insight into Asian compensation practices is offered in “CEO compensation and corporate governance in China”, by Conyon and He. As shown in our earlier content analysis of international compensation studies, China has seen few studies relative to the size of the nation's economy. As the authors note in this paper, disclosure of compensation data is a recent development for publicly held Chinese firms. As such, this helps to explain the scarcity of research, and also suggests that many other studies will follow that are focused on this region. The authors begin with a discussion of trends among Chinese firms, including CEO compensation practices, norms for CEO equity positions, corporate ownership, and board composition. Trends are also noted for each of these areas, documenting a rapidly evolving landscape. Next, the article addresses three questions: First, how closely is CEO pay linked to accounting and market-based measures of firm performance? Second, what role does corporate governance play in setting CEO pay? Finally, are pay processes in China static or dynamic? Overall, this study provides a valuable window into the importance of governance for firms in a transition economy.
Our last article is “Relation between top executive compensation structure and corporate governance: Evidence from Japanese public disclosed data”, by Sakawa, Moriyama, and Watanabel. This article takes advantage of new reporting requirements subsequent to the time period studied by Colpan and Yoshikawa. More specifically, Japan adopted new disclosure rules starting in 2009, requiring public firms to provide base salary, bonus, stock option, and additional income for officers or directors whose total compensation exceeds 100 million yen. This article examines issues associated with the compensation of 291 executives, both CEOs and senior leaders, of publicly held Japanese firms. In particular, the article examines the use of cash and stock-based incentive pay, as Japanese firms transition to a more Western style of corporate governance. Using an agency framework, the paper find that long-term incentive pay is related to the degree of foreign ownership and the presence of outside directors on the board. In contrast, the use of committees and managerial entrenchment is associated with an emphasis on short-term incentives.
Suggestions for Future Studies
Based on our content analysis and the articles contained in this special issue, we would like to offer three broad suggestions for future studies. While the specific topics of the articles reviewed are only loosely related, they share the emphasis of broadening the scope of international compensation research.
Given the scarcity of international studies of executive compensation, the extant theories (e.g., agency theory and managerialism theory) are almost exclusively developed in the US context. We urge researchers to conduct more international research. This suggestion may be an old theme; however, it is still very relevant to the understanding of executive compensation. By more international research, we mean two things. The first is to conduct more cross-country research, which enables researchers to better understand how institutional contexts at the country level influence executive compensation practices (i.e., between-country variation in executive compensation). Just as most international governance studies are single-nation in scope (Filatotchev & Boyd, 2009), international compensation studies follow the same pattern. Thus, multi-country studies with a comparative focus are needed. This approach can also help us better understand to what extent theories developed in the US context can be generalized in other institutional contexts. The second is to develop new theories of executive compensation that are specific to an institutional context that is different from the US. This approach focuses on the within-country variation in executive compensation, which enables researchers to better understand the relative explanatory power of different factors within a non-US context.
A prominent topic in the governance literature is the question of convergence – i.e., whether there is a trend toward increasing standardization of governance structures and processes across nations. For example, governance codes often emphasize similar norms and guidelines regardless of country-level factors (Norburn, Boyd, Fox, & Muth, 2000). However, a review of empirical studies (Yoshikawa & Rasheed, 2009:388) concluded that there is, at best, only “limited evidence” of convergence. And, if corporate governance – a key influence on executive pay – is not converging globally, should we expect compensation practices to be standardized as well? Key issues related to the design of executive pay plans remain unanswered:
A crucial question that arises as a result of increased globalization of business is whether reward systems should be customized to meet the needs of individuals within diverse cultures or compensation strategies that work in a domestic environment can be easily transferred from one country to another. So, it is not just a question of molding pay strategies to organizational strategies but also of ensuring that the compensation system is attuned to the cultural milieu (Gomez-Mejia, Berrone, & Franco-Santos, 2010:109).
A review of cultural norms, and their variability across nations, reinforces the call by Gomez-Mejia and colleagues to examine both the antecedents and consequences of executive pay in more detail. For example, Table 3 reported the geographic distribution of international executive compensation studies found in our content analysis. This table also includes the respective country scores for Hofstede's five cultural dimensions (Hofstede, 2012). Not only do the scores vary substantially from country to country, but there is also substantial variation within regions: For instance, China and Taiwan have very different power distance scores, and Spain and the Netherlands vary markedly in their long-term time orientation. The two theory-based articles in our special issue (Geletkanycz & Sanders; Wiseman et al.) both highlight the role of contextual factors in optimizing the effectiveness of executive pay plans. Each of the cultural dimensions – power distance, individualism, masculinity, uncertainty avoidance, and time orientation – has strong implications for the manner in which executives in different countries will respond to different types of incentives, as well as how the board may approach the design of these incentives. Boyd, Haynes, and Zona (2011) offer an agenda of research opportunities for studying the interaction between boards and their CEOs using an international lens.
Our second suggestion is to utilize a broader portfolio of theoretical perspectives in future research on executive compensation. This recommendation is by no means new. Compensation scholars have made similar proposals on numerous occasions (e.g., Gomez-Mejia et al., 2010; Merchant, Van der Stede, & Zheng, 2003); however, as our review shows, researchers still use a very narrow theoretical focus. As noted previously, agency theory is the primary framework for studying compensation, and Table 2 confirms that the same is true for international executive compensation studies as well. The theory-based papers in this special issue highlight the need for using a broader theoretical lens. First, Geletkanycz and Sanders identify the importance of a behavioral perspective for understanding executive pay. Instead of assuming managers as rational decision makers who constantly attempt to maximize personal interests, researchers need to empirically investigate their goals and aspirations (March & Simon, 1958) as well as how their values, experiences, backgrounds, and personality influence their goals, aspirations, decisions, and behavior (Hambrick & Mason, 1984). Further, researchers need to pay attention to the impact of managerial discretion on executive compensation, especially the extent to which managerial discretion is influenced by the larger institutional context (Crossland & Hambrick, 2007; Finkelstein & Boyd, 1998). Clearly, the behavioral approach to the study of executive compensation requires researchers to incorporate the larger institutional context into the development of new theories of executive compensation as well. Second, Wiseman and colleagues emphasize how relevant concepts such as trust modify basic agency assumptions.
More broadly, these are just a subset of the theoretical perspectives that can be applied to the study of executive pay. The primary actors for this topic are the board of directors, who design a package, and the top executives, who take action based on the nature of the compensation plan. Boyd et al. (2011) conducted a content analysis of empirical studies that explored CEO–board interactions over a two-and-a-half-decade period. They identified a half dozen key theoretical perspectives used in this body of research. Additionally, they concluded that studies incorporating a multi-theoretic perspective (e.g., concurrent tests of agency and stewardship hypotheses, versus testing solely agency or solely stewardship) yielded more meaningful results. Thus, we encourage researchers to use both a broader quiver of theories, and to do so concurrently. For example, the article by Frankforter and colleagues included in this issue combined multiple theories to predict the likelihood of stock option backdating.
Our third suggestion is to address the issues associated with executive compensation using a more diverse methodological approach. Most research to date has the sole purpose to test theory (mainly agency theory as mentioned earlier) and uses quantitative methods to do so. Indeed, all of the studies included in our review had a theory testing aim and used either survey or archival research methods. However, existing theory and literature have limitations for identifying underlying phenomena, as has been reflected in the number of recent executive compensation scandals. The literature on executive compensation could seriously benefit from theory building research that adopts more qualitative methods or mixed methods approaches. Theory building research and qualitative empirical work in this field are rare and should be cherished in order to enhance our understanding of executive compensation.
Executive pay is an extremely high-profile topic, in both academic and practitioner circles. In practice, discussions often center on the question “are top executives overpaid”, and emphasize issues such as salary caps, or disparities between the highest and lowest paid employees in a firm. However, the critical issues are whether compensation is designed to optimally support a firm's strategic goals, and whether there are local or global predictions regarding such optimization. We hope that the contents of this special issue will help to shift the discussion to a more strategic level.
Electronic records for Corporate Governance: An International Review were not available prior to 1997.