CEO compensation is often seen, at least by the public, as too high and out of touch with the compensation of common workers. A study at Louisiana State University investigated the pay dispersion relationship between CEO compensation and general employee compensation across 54 countries by examining the role of informal and formal country-level institutions of social power structures, such as level of country development, strength of collective labor rights, and supply and demand market forces. Analysis found that a number of these structures effect CEO and employee compensation, as well as pay dispersion.
Key Topics: CEO compensation; Pay dispersion
Title of Reviewed Article: CEO Compensation in Relation to Worker Compensation across Countries: The Configurational Impact of Country-level Institutions
Researchers: Thomas Greckhamer (Louisiana State University)
Publication: Strategic Management Journal, 2016, Vol. 37 No. 4, pp. 793-815.
Setting the Scene
Executive compensation, and in particular CEO compensation, and its relativity to general employee compensation is a hotly debated topic by researchers, practitioners, and the public alike (Shin, 2014; Tosi & Greckhamer, 2004). Coupled with this, there is a growing interest by researchers in international differences in compensation levels and practices (Fernandes et al., 2013; Greckhamer, 2011).
Prior research suggests that relative power is a primary determinant of compensation for both CEOs and general employees, as reflected by power structures underlying companies (Bebchuk, Fried, & Walker, 2002; Shin, 2014). Weber (1964) defined power as being the ability of one party within a social relationship to be able to carry out their own will, which in the context of compensation would involve the ability of parties to extract more compensation.
The present study looked to further examine cross-national differences in compensation by exploring how formal and informal institutional factors of countries social power structures shape a country’s CEOs and employees’ compensation levels and the resulting pay dispersion between these two groups. Institutional factors, in the context of this study, include the likes of country level of development, various types of financial and labor institutions, market determinants for occupational groups’ skills, as well as cultural acceptance of social inequality.
Research suggests that these institutional factors have a significant bearing on a country’s compensation practices. For example, labor productivity development impacts on a country’s availability of wealth and how it is distributed (Nafziger, 2006). Similarly, a country’s collective bargaining environment is expected to increase the power of employees and their likelihood of receiving higher relative compensation (Rueda & Pontusson, 2000). While compensation is also impacted by the likes of market forces relating to the relative scarcity or abundance of particular skills in a country which effects the compensation bargaining power of these groups (Bebchuk & Fried, 2003).
How the research was conducted
The researcher collected data from multiple years between 2001 and 2009. CEOs and employee compensation information from the manufacturing sector in 54 countries was collected, primarily from IMD World Competitiveness Yearbooks. The countries included in the study were globally spread, and included the likes of Brazil, China, Turkey, United Kingdom, and United States.
Data was also collected in relation to various other country related factors, including economic development, capital institutions (relating to a country’s equity markets), foreign capital penetration, collective labor institutions, strength of a country’s welfare state institutions, social acceptance of inequality, and labor market influences on compensation. This data was collected from various sources such as the World Bank, and the UN Conference on Trade and Development data center, the World Health Association (WHO).
CEO total compensation was collected for companies with a minimum turnover of $250m, and included salary plus short and long term incentives. Employee compensation was calculated on a similar basis, while country level pay dispersion was calculated as a ratio of CEO to employee compensation.
Key Research Findings
A consistent link across countries between high CEO pay and supply and demand of senior managerial labor was not established.
The absence of strong collective labor rights and a high power distance were consistently linked to relatively high CEO pay. Conversely, high collective labor rights, a strong welfare state, and a lack of power distance were all core factors in the absence of high CEO pay.
While previous studies had found CEO pay to be positively linked to national wealth (Tosi & Greckhamer, 2004), this study found no relationship between a country’s level of development and high CEO pay.
Analysis found that multiple factors were linked consistently with high employee compensation, and most significantly high development and low power distance.
Additionally, in developed countries, ready availability of labor was linked to higher employee compensation.
As expected, a strong welfare state and/or strong collective labor rights were complementary to higher employee pay.
Various factors were found to be consistently linked to high pay dispersion between CEO and employee pay, most notably the absence of strong labor institutions and acceptance culturally of hierarchical authority.
The finding that market forces of supply and demand were found to not universally determine CEO pay in different countries is interesting, indicating the complexity of determining CEO pay. In some instances, CEOs were found to receive higher pay even when there was an abundance of similar managerial talent, while in other countries CEO pay was constrained regardless of availability of talent.
The finding that the lack of collective labor rights and high power distance combine to support high CEO pay suggests that strong cultural acceptance of hierarchical power structures as well as a lack of labor empowering institutions are important conditions in elevating CEO relative compensation. Similarly, it is unsurprising that institutions empowering employees and the lack of cultural acceptance of high hierarchical differentiation combine to restrain CEO compensation.
The fact that lack of power distance was found to be fundamental to employees receiving better compensation is consistent with the idea that countries with these conditions tend to have more equitable compensation systems that place labor in higher regard and compensate them as such (Hofstede, 2001).
Contrary to predictions, compensation was higher in developed countries when there was ready availability of workers, suggesting that a strong foundation of skilled workers empowers the attainment of higher pay, where there are complementary factors, such as strong labor institutions and low power distance.
The finding that pay dispersion is greater when labor institutions are weaker and hierarchy is more culturally accepted suggest that these combined factors may free CEO pay from political or regulatory constraints while reducing employees’ power in negotiating greater pay.
Organizational and Reward Implications
This study highlights many of the various external factors that affect CEO and employee compensation, and pay dispersion, from supply and demand and labor rights, to the development of equity markets and country development. However, what should not be forgotten is that companies are not fully at the mercy of these structures and external influences in determining their compensation practices, and in particular should consider their desired position in relation to pay dispersion and how it ties to their company goals and culture.
This study extends the research on CEO and employee compensation across countries and how institutional power structures influence pay. Further research could benefit from examination of other factors in these relationships, such as the type of company ownership and company size.
Source Article: Greckhamer, T. (2016). CEO Compensation in Relation to Worker Compensation across Countries: The Configurational Impact of Country-level Institutions. Strategic Management Journal, 37(4), 793-815.
Published by: John Wiley & Sons, Ltd.
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