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

Abstract

Research Summary A number of studies examine the extent to which boards compensate CEOs for their firm's performance (i.e., pay‐for‐performance), but these studies typically do not incorporate what CEOs actually do to bring about those performance outcomes. We suggest that directors will make stronger internal attributions about firm performance when the CEO engages in high levels of corporate strategic investment. CEOs that invest in firm growth essentially “place their bets,” so the pay‐for‐performance relationship is stronger for them than it is for CEOs who do not invest as much in firm growth. We also theorize and find that directors make internal attributions about firm performance more for prestigious, but not less prestigious, CEOs and more when the directors collectively exhibit conservative, but not liberal, political ideologies. Managerial Summary Shareholders and other stakeholders often demand that CEOs should be paid for performance. In other words, CEOs should be paid well when the company is performing well and paid less when the company is not performing well. We add an additional dimension: boards might also consider what CEOs actually do to bring about performance outcomes. Our findings suggest that when CEOs make heavy corporate investments, they essentially “place their bets.” In this scenario, boards attribute performance to the CEO so that CEO compensation rises and falls with company performance. When CEOs make fewer corporate investments, their compensation is not as strongly associated with company performance. This primary relationship is particularly true when CEOs have high social recognition or when the directors are collectively conservative.

CEO dismissal: Consequences for the strategic risk taking of competitor CEOs

“…We used a summative measure of strategic risk taking (e.g., Chatterjee & Hambrick, 2011; Shi et al, 2019; Zhu & Chen, 2015), but it could also be meaningful to examine the individual components of strategic risk taking (i.e., R&D intensity, capital expenditure intensity, and acquisition intensity). In unreported results, we find support for our main effect using R&D intensity and capital expenditure intensity.…”

“…Some have investigated one or more individuated components of strategic risk taking (Beckman & Haunschild, 2002; Sanders & Hambrick, 2007; Zhu & Chen, 2015). Others, though, prefer a summated measure designed to capture strategic risk taking on the whole (Chatterjee & Hambrick, 2011; Shi et al, 2019; Zhu & Chen, 2015). We follow the latter approach, measuring the sum of research and development (R&D), capital expenditures, and acquisitions scaled by total revenues, which we believe is consistent with our theory about overall strategic decision‐making (Coltman, Devinney, Midgley, & Venaik, 2008).…”

“…Further, although strategic risk taking is critical to long‐run competitiveness (Karim & Mitchell, 2000), it can adversely affect short‐term performance (Shapira, 1995), placing the CEO's job at risk. This is echoed by a recent study finding that CEOs will receive lower compensation if they have engaged in more intensive risk taking when firms underperform relative to industry peers (Shi et al, 2019). Therefore, to preserve their job, competitor CEOs could place a priority on seeking reasonable, status quo firm performance, avoiding the kind of risky investments that could put their job in peril if the investments fail to achieve their anticipated benefits (Mannor et al, 2016).…”

“…The CEO has reached the pinnacle of the organization, and job preservation is of paramount concern when they face heightened job insecurity (Bertrand & Mullainathan, 2003; Mannor, Wowak, Bartkus, & Gomez‐Mejia, 2016). One course of action over which CEOs have significant discretion is firm risk taking (Shi, Connelly, Mackey, & Gupta, 2019). Although risk taking could improve a firm's long‐term competitiveness and performance (Hoskisson, Chirico, Zyung, & Gambeta, 2017), it can be associated with significant decision errors and give rise to performance swings.…”

Political directors and corporate social responsibility: Are political ideology and regional identity relevant?

“…While individuals with a conservative ideology share a greater affinity for individualism and free markets (Jost et al 2003;Carney et al 2008;Gupta and Wowak 2017), liberal ideology is associated with the defense of social justice, the fight against social and economic inequality, and is linked to egalitarianism and compassion (Evans et al 1996;Jost et al 2003;Jost 2006;Shi et al 2019). Within the framework of a political system, these ideological beliefs are generally aligned with programs defended by political parties, which are also classified as either liberalism or conservatism.…”