In this study we introduce a justice perspective to examining the result of bargaining between CEOs and boards over the allocation of firm residuals that ultimately determines CEO compensation. Framing CEO pay as the result of bargaining between CEOs and boards focuses attention on the power of CEOs to increase their share of firm residuals in the form of increased compensation, and the diligence of boards of directors to constrain CEO opportunism. Framing this negotiation through a theory of justice offers an alternative perspective to the search for pay-performance sensitivity. We predict and find that as board diligence in controlling opportunism declines and CEO power increases, CEOs are increasingly able to capture a larger portion of firm residuals relative to shareholders. This finding supports critics who charge that CEO pay violates norms of distributive and procedural justice.Keywords: CEO compensation, agency theory, board monitoring, distributive justiceFollowing agency theory prescriptions for controlling agency opportunism (e.g., Eisenhardt, 1989;Jensen & Meckling, 1976), corporate America increasingly adopted pay schemes that linked a portion of agent compensation to outcomes important to principals. For example, virtually 100% of CEOs' pay today includes some form of performance contingent pay. This widespread use of contingent pay has provoked a large escalation in the use of equity forms of compensation (particularly restricted stock and stock options) over the past 25 years. The use of equity forms of compensation was thought to tie executive pay more closely to shareholder wealth and led to hundreds of studies attempting to measure this link, generally known as pay-performance sensitivity (Gomez-Mejia & Wiseman, 1997).Corresponding to the increased reliance on equity-based pay is a greater increase in the amount of compensation awarded to senior executives, especially CEOs. For example, average CEO compensation rose as much as 614% in real dollars between 1980 and 2004 compared to a 7% rise in average worker pay over the same period (Bogle, 2008). Others have also noted extraordinary rise in CEO compensation in recent years, most of it due to increases in equity pay (Bebchuk & Grinstein, 2005;Frydman & Saks, 2010;Walsh, 2008). This rise in pay has not gone unnoticed by the media, who question the size of CEO pay packages by noting the growing disparity between NOT THE PUBLISHED VERSION; this is the author's final, peer-reviewed manuscript. The published version may be accessed by following the link in the citation at the bottom of the page. (June 4, 2014). DOI. This article is © SAGE Publications and permission has been granted for this version to appear in e-Publications@Marquette. SAGE Publications does not grant permission for this article to be further copied/distributed or hosted elsewhere without the express permission from SAGE Publications.
Journal of Management,
3CEO pay and that of other segments of society (Deutsch, 2008;Morgenson, 2013). While agency theory provides a stro...