CEO Overpayment and Dismissal: The Role of Attribution and Attention

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: This study investigates the moderating role of CEO overpayment on the relationship between firm performance and CEO dismissal. We also examine how contextual factors, including compensation disclosure regulation, firm index status, and firm age, influence board attention and attribution, and consequently affect the sensitivity of CEO dismissal to firm performance. Research Findings/Insights: Using a sample of Chinese listed firms between 2002 and 2011, we find that overpaid CEOs are associated with a larger likelihood of dismissal in case of poor firm performance compared to their underpaid counterparts. In addition, CEO overpayment has a larger influence on the turnover-performance relationship when executive compensation disclosure is mandatory, when a firm is index-included, or younger. Theoretical/Academic Implications: This study provides empirical support for attribution theory and the attention-based view. Built on the concept of bounded rationality, it demonstrates that board sense-making and causal attributions affect the CEO dismissal decision. Our study also sheds light on the influence of situational cues on shaping board attention and subsequent corporate governance decisions. Practitioner/Policy Implications: This study offers insights to policymakers interested in enhancing the design of corporate governance mechanisms by paying attention to cognitive processes in the boardroom.

Changing words: How temporal consistency in a CEO's use of language toward shareholders and stakeholders affects CEO dismissal

“…Finally, future research should test whether the current findings generalize to non‐U.S. countries with different cultures, socioeconomic institutions, and governance models (Bezemer, Zajac, Naumovska, van den Bosch, & Volberda, ; He & Fang, ). Such research would advance our understanding of the impact of signaling on governance outcomes in various institutional settings.…”

“…Selecting a CEO and, if necessary, firing a CEO are among a board's most important responsibilities. Recent studies have recognized the importance of cognitive processes in CEO dismissal (Graffin, Boivie, & Carpenter, ; Haleblian & Rajagopalan, ; He & Fang, ; Wiersema & Zhang, ). The basic argument is that CEO dismissal entails the board's assessment of his or her competencies and performance.…”

“…Unlike existing studies that examine signals created by other corporate constituents such as the media or stock analysts, we directly analyze CEOs' use of language in public documents. & Carpenter, 2013;Haleblian & Rajagopalan, 2006;He & Fang, 2016;Wiersema & Zhang, 2011). The basic argument is that CEO dismissal entails the board's assessment of his or her competencies and performance.…”

“…As in any social judgments made by workgroups in complex organizations, this assessment process is fraught with ambiguities and uncertainties (Forbes & Milliken, 1999;Rindova, 1999). Boards face the cognitive challenge of interpreting the ambiguous relationship between the CEO's actions and firm performance outcomes, which requires a causal attribution of firm performance to the CEO's actions as opposed to any exogenous factors (Bettman & Weitz, 1983;He & Fang, 2016;Meindl, Ehrlich, & Dukerich, 1985;Sun & Shin, 2014).…”

Placing their bets: The influence of strategic investment on CEO pay‐for‐performance

“…For example, several studies have found that external observers, such as shareholders and information intermediaries, tend to make internal attributions about executives' responsibility for alleged instances of fraud (Gangloff, Connelly, & Shook, 2016;Gomulya & Boeker, 2014;Kang, 2008). Others focus on poor firm performance, finding that external observers favor internal attributions for failure, which often results in the dismissal of top executives (Hambrick & Quigley, 2014;He & Fang, 2016). Consistent with these ideas, Gibson and Schroeder (2003) find that, in the event of organizational failures, observers tend to blame upper-level, as opposed to lower-level, employees.…”