Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-23T05:01:38.672Z Has data issue: false hasContentIssue false
  • English
  • Français

TMT pay dispersion and firm performance: the moderating role of organizational governance effectiveness

Published online by Cambridge University Press:  10 February 2015

Gregorio Sanchez-Marin  and
J. Samuel Baixauli-Soler
Gregorio Sanchez-Marin*
Affiliation:
Department of Management and Finance, University of Murcia, Murcia, Spain
J. Samuel Baixauli-Soler
Affiliation:
Department of Management and Finance, University of Murcia, Murcia, Spain
*
Corresponding author: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

This study supports tournament theory in relation to high levels of organizational hierarchies, indicating that the job complexity facing the top management team supposes that pay dispersion positively influences firm performance. Examining a sample of 709 firm-year observations of Spanish listed companies spanning the period 2004–2012, our results indicate that the association between firm performance and top management team pay dispersion is conditional on the effectiveness of corporate governance. High top management team pay dispersion is associated with better performance in owner-controlled firms, where more effective monitoring is exerted by the board of directors.

Keywords

compensation dispersiontop management teamtournament theorygovernance effectivenessfirm performance
Type
Research Article
Information
Journal of Management & Organization , Volume 21 , Issue 4 , July 2015 , pp. 436 - 459
Copyright
Copyright © Cambridge University Press and Australian and New Zealand Academy of Management 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, J. S. (1965). Inequity in social exchange. In L. Berkowitz (Ed.), Advances in experimental social psychology, vol. 2 (pp. 267–299). New York, NY: Academic Press.Google Scholar
Aggarwal, R., & Samwick, A. (2003). Performance incentives within firms: The effect of managerial responsibility. Journal of Finance, 58, 1613–1650.CrossRefGoogle Scholar
Aguilera, R. V., & Cuervo-Cazurra, A. (2009). Codes of good governance. Corporate Governance: An International Review, 17, 376–387.Google Scholar
Almazan, A., & Suarez, J. (2003). Entrenchment and severance pay in optimal governance structures. Journal of Finance, 58, 519–548.Google Scholar
Alvarez, M. D., & Neira, E. (1999). Determinantes del nivel de retribución y del porcentaje de retribución variable de la alta dirección. Revista Europea de Dirección y Economía de la Empresa, 8, 83–108.Google Scholar
Anderson, T. W., & Hsiao, C. (1981). Estimation of dynamic models with error components. Journal of the American Statistical Association, 76, 589–606.Google Scholar
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economics Studies, 58, 277–297.CrossRefGoogle Scholar
Baixauli-Soler, J. S., & Sanchez-Marin, G. (2011). Organizational governance and TMT pay level adjustment. Journal of Business Research, 64, 862–870.Google Scholar
Baixauli-Soler, J. S., & Sanchez-Marin, G. (2015). Executive compensation and corporate governance in Spanish listed firms: A principal-principal perspective. Review of Managerial Science, 9, 115–140.Google Scholar
Baltagi, B. H. (2001). Econometric analysis of panel data. Chichester: Wiley.Google Scholar
Becker, B. E., & Huselid, M. A. (1992). The incentive effects of tournament compensation systems. Administrative Science Quarterly, 37, 336–350.CrossRefGoogle Scholar
Bloom, M. (1999). The performance effects of pay dispersion on individuals and organizations. Academy of Management Journal, 42, 25–40.Google Scholar
Bloom, M., & Michel, J. G. (2002). The relationships among organizational context, pay dispersion, and managerial turnover. Academy of Management Journal, 45, 33–42.CrossRefGoogle Scholar
Boyd, B. K. (1995). CEO duality and firm performance: A contingency model. Strategic Management Journal, 16, 301–312.Google Scholar
Bozec, Y., & Bozec, R. (2007). Ownership concentration and corporate governance practices: Substitution or expropriation effects? Canadian Journal of Administrative Sciences, 24, 182–195.Google Scholar
Brown, M. P., Sturman, M. C., & Simmering, M. J. (2003). Compensation policy and organizational performance: The efficiency, operational, and financial implications of pay levels and pay structure. Academy of Management Journal, 46, 752–762.Google Scholar
Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. The Accounting Review, 73, 305–333.Google Scholar
Cadbury, A. (1992). Report of the committee on the financial aspects of corporate governance. London: GEE.Google Scholar
Carpenter, M. A., & Sanders, W. G. (2002). Top management team compensation: The missing link between CEO pay and firm performance? Strategic Management Journal, 23, 367–375.Google Scholar
Chen, J., Ezzamel, M., & Cai, Z. (2011). Managerial power theory, tournament theory, and executive pay in China. Journal of Corporate Finance, 17, 1176–1199.Google Scholar
Código Unificado de Buen Gobierno (2006). Informe del grupo especial de trabajo sobre el buen gobierno de las sociedades cotizadas. Madrid: CNMV.Google Scholar
Coles, J. L., Daniel, N. D., & Naveen, L. (2006). Managerial incentives and risk-taking. Journal of Financial Economics, 79, 431–468.Google Scholar
Conyon, M. J., & He, L. R. (2011). Executive compensation and corporate governance in China. Journal of Corporate Finance, 17, 1158–1175.Google Scholar
Conyon, M. J., & Peck, S. I. (1998). Board control, remuneration committees, and management compensation. Academy of Management Journal, 41, 135–145.Google Scholar
Conyon, M. J., Peck, S. I., & Sadler, G. V. (2001). Corporate tournaments and executive compensation: Evidence from the UK. Strategic Management Journal, 22, 805–815.Google Scholar
Core, J., Holthausen, R., & Larcker, D. (1999). Corporate governance, chief executive officer compensation and firm performance. Journal of Financial Economics, 51, 371–406.Google Scholar
Cowherd, D. M., & Levine, D. (1992). Product quality and pay equity between lower-level employees and top management. Administrative Science Quarterly, 37, 302–320.CrossRefGoogle Scholar
Crespi, R., & Gispert, C. (2003). Total board compensation, governance and performance of Spanish quoted companies. Labour, 17, 103–126.Google Scholar
Cuervo, A. (2002). Corporate governance mechanisms: A plea for less code of good governance and more market control. Corporate Governance: An International Review, 10, 84–93.Google Scholar
Daily, C. M., Johnson, J. L., Ellstrand, A. E., & Dalton, D. R. (1998). Compensation committee composition as a determinant of CEO compensation. Academy of Management Journal, 41, 209–220.CrossRefGoogle Scholar
David, P., Kochhar, R., & Levitas, E. (1998). The effect of institutional investors on the level and mix of CEO compensation. Academy of Management Journal, 41, 200–208.CrossRefGoogle Scholar
De Andres, P., Azofra, V., & Lopez, F. J. (2005). Corporate boards in OECD countries: Size, composition, functioning and effectiveness. Corporate Governance International Review, 13, 197–210.Google Scholar
de Miguel, A., Pindado, J., & de la Torre, C. (2004). Ownership structure and firm value: New evidence from Spain. Strategic Management Journal, 25, 1199–1207.Google Scholar
Demsetz, H. (1983). The structure of ownership and theory of the firm. Journal of Law and Economics, 26, 375–390.Google Scholar
Deutsch, M. (1985). Distributive justice: A social-psychological perspective. New Haven, CT: Yale University Press.Google Scholar
Deutsch, Y. (2005). The impact of board composition on firms’ critical decisions: A meta-analytic review. Journal of Management, 31, 424–444.CrossRefGoogle Scholar
Devers, C. E., Cannella, A. A., Reilly, G. P., & Yoder, M. E. (2007). Executive compensation: A multidisciplinary review of recent developments. Journal of Management, 33, 1016–1072.Google Scholar
Ding, D. Z., Akhtar, S., & Ge, G. L. (2009). Effects of inter- and intra-hierarchy wage dispersions on firm performance in Chinese enterprises. International Journal of Human Resource Management, 20, 2370–2381.Google Scholar
Ehrenberg, R. G., & Bognanno, M. L. (1990a). The incentive effects of tournaments revisited: Evidence from the European PGA Tour. Industrial and Labor Relations Review, 43, 74–88.Google Scholar
Ehrenberg, R. G., & Bognanno, M. L. (1990b). Do tournaments have incentive effects? Journal of Political Economy, 98, 1307–1324.Google Scholar
Ensley, M. D., Pearson, A. W., & Sardeshmukh, S. R. (2007). The negative consequences of pay dispersion in family and non-family top management teams: An exploratory analysis of new venture, high-growth firms. Journal of Business Research, 60, 1039–1047.Google Scholar
Eriksson, T. (1999). Executive compensation and tournament theory: Empirical test on Danish data. Journal of Labor Economics, 17, 262–280.Google Scholar
Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. Journal of Law and Economics, 26, 327–349.Google Scholar
Finkelstein, S., & Boyd, B. K. (1998). How much does the CEO matter? The role of managerial discretion in the setting of CEO compensation. Academy of Management Journal, 41, 179–199.Google Scholar
Fredrickson, J. W., Davis-Blake, A., & Sanders, G. W. (2010). Sharing the wealth: Social comparisons and pay dispersion in the CEO’s top team. Strategic Management Journal, 31, 1031–1053.CrossRefGoogle Scholar
Gerhart, B., & Rynes, S. L. (2003). Compensation: Theory, evidence, and strategic implications. Thousand Oaks, CA: Sage.Google Scholar
Gupta, N., Conroy, S. A., & Delery, J. E. (2012). The many faces of pay variation. Human Resource Management Review, 22, 100–115.Google Scholar
Gutierrez, M., & Saez, I. (2012). Deconstructing independent directors, ECGI Law Working Paper No. 186/2012. Retrieved from SSRN: http://dx.doi.org/10.2139/ssrn.1986842.Google Scholar
Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2010). Multivariate data analysis (7th ed.). Upper Saddle River, NJ: Prentice Hall.Google Scholar
Hambrick, D. C., & Finkelstein, S. (1995). The effects of ownership structure on conditions at the top: The case of CEO pay raises. Strategic Management Journal, 16, 175–194.Google Scholar
Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica, 50, 1029–1054.Google Scholar
Hartzell, J. C., & Starks, L. T. (2003). Institutional investors and executive compensation. Journal of Finance, 58, 2351–2374.Google Scholar
Henderson, A. D., & Fredrickson, J. W. (2001). Top management team coordination needs and the CEO pay gap: A competitive test of economic and behavioral views. Academy of Management Journal, 44, 96–117.Google Scholar
Hermalin, B. E., & Weisbach, M. S. (2003). Boards of directors an endogenously determined institution: A survey of the economic literature. Economic Policy Review, 9, 7–26.Google Scholar
Hibbs, D., & Locking, H. (2000). Wage dispersion and productive efficiency: Evidence from Sweden. Journal of Labor Economics, 18, 755–782.Google Scholar
Himmelberg, C. P., Hubbard, R. G., & Palia, D. (1999). Understanding the determinants of managerial ownership and the link between ownership and performance. Journal of Financial Economics, 53, 353–384.CrossRefGoogle Scholar
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. Journal of Applied Corporate Finance, 6, 4–23.Google Scholar
Lambert, R., Lacker, D.F., & Weiglet, K. (1993). The structure of organizational incentives. Administrative Science Quarterly, 38, 438–461.Google Scholar
La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54, 471–517.Google Scholar
Lambert, R. A., Larcker, D. F., & Weigelt, K. (1993). The structure of organizational incentives. Administrative Science Quarterly, 38, 438–461.Google Scholar
Lazear, E. P. (1989). Pay equality and industrial politics. Journal of Political Economy, 97, 561–580.Google Scholar
Lazear, E. P. (1999). Personnel economics: Past lessons and future directions. Journal of Labor Economics, 17, 199–236.CrossRefGoogle Scholar
Lazear, E. P., & Rosen, S. (1981). Rank order tournaments as optimum labor contracts. Journal of Political Economy, 89, 841–864.Google Scholar
Lee, K. W., Lev, B. I., & Yeo, G. H. H. (2008). Executive pay dispersion, corporate governance and firm performance. Review of Quantitative Finance and Accounting, 30, 315–338.Google Scholar
Leech, D., & Manjon, M. C. (2002). Corporate governance in Spain (with application of the power indices approach). European Journal of Law and Economics, 13, 157–173.Google Scholar
Levine, D. I. (1991). Cohesiveness, productivity, and wage dispersion. Journal of Economic Behavior and Organization, 15, 237–255.Google Scholar
Lin, B., & Lu, R. (2009). Managerial power compensation gap and firm performance – evidence from Chinese public listed companies. Global Finance Journal, 20, 153–164.Google Scholar
Lin, Y. F., Yeh, Y. M. C., & Shih, Y. T. (2013). Tournament theory’s perspective of executive pay gaps. Journal of Business Research, 66, 585–592.Google Scholar
Main, B. G., O’Reilly, C. A., & Wade, J. (1993). Top executive pay: Tournament or teamwork? Journal of Labor Economics, 11, 606–628.Google Scholar
Mehran, H. (1995). Executive compensation structure, ownership and firm performance. Journal of Financial Economics, 38, 163–184.Google Scholar
Morck, R., Shleifer, A., & Vishny, R. (1988). Management ownership and market valuation: an empirical analysis Journal of Financial Economics, 20, 292–315.Google Scholar
Morck, R., Wolfenzon, D., & Yeung, B. (2005). Corporate governance, economic entrenchment, and growth. Journal of Economic Literature, 63, 655–720.Google Scholar
O’Reilly, C. A., Main, B. G., & Crystal, G. S. (1988). CEO compensation as tournament and social comparison: A tale of two theories. Administrative Science Quarterly, 33, 257–274.Google Scholar
Okzan, A., & Okzan, N. (2004). Corporate cash holding: An empirical investigation of UK companies. Journal of Banking and Finance, 28, 2103–2134.Google Scholar
Pfeffer, J., & Langton, N. (1993). The effects of wage dispersion on satisfaction, productivity, and working collaboratively: Evidence from college and university faculty. Administrative Science Quarterly, 38, 382–407.Google Scholar
Rajan, R. (1992). Insiders and outsiders: The choice between relationship and arms-length debt. Journal of Finance, 47, 1367–1400.Google Scholar
Rediker, K., & Seth, A. (1995). Board of directors and substitution effects of alternative governance mechanisms. Strategic Management Journal, 16, 85–99.Google Scholar
Romero, M. G., & Valle, R. (2001). Strategy and manager’s compensation: The Spanish case. International Journal of Human Resource Management, 12, 218–242.CrossRefGoogle Scholar
Ryan, H., & Wiggins, R. (2004). Who is in whose pocket? Director compensation, board independence and barriers to effective monitoring. Journal of Financial Economics, 73, 497–524.CrossRefGoogle Scholar
Salas, V. (2002). El gobierno de la empresa. Barcelona: Colección de Estudios Económicos de La Caixa.Google Scholar
Sanchez-Marin, G., & Baixauli-Soler, J. S. (2014). CEO reputation and top management team compensation: The moderating role of corporate governance. Management Decision, 52, 540–558.Google Scholar
Sanchez-Marin, G., Baixauli-Soler, J. S., & Lucas-Perez, M. E. (2010). When much is not better? Top management compensation, board structure and performance in Spanish firms. International Journal of Human Resource Management, 21, 2778–2797.CrossRefGoogle Scholar
Sanchez-Marin, G., Baixauli-Soler, J. S., & Lucas-Perez, M. E. (2011). Ownership structure and board effectiveness as determinants of TMT compensation in Spanish listed firms. Journal of Business Economics and Management, 12, 92–109.Google Scholar
Shaw, J. D., Gupta, N., & Delery, J. E. (2002). Pay dispersion and workforce performance: Moderating effects of incentives and interdependence. Strategic Management Journal, 23, 491–512.Google Scholar
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52, 737–784.Google Scholar
Siegel, P. A., & Hambrick, D. C. (2005). Pay disparities within top management groups: Evidence of harmful effects on performance of high-technology firms. Organizational Science, 16, 259–274.Google Scholar
Tosi, H. L., & Gomez-Mejia, L. R. (1989). The decoupling of CEO pay and performance: An agency theory perspective. Administrative Science Quarterly, 34, 169–189.Google Scholar
Tosi, H. L., & Gomez-Mejia, L. R. (1994). CEO compensation monitoring and firm performance. Academy of Management Journal, 37, 1002–1016.Google Scholar
Werner, S., Tosi, H. L., & Gomez-Mejia, L. (2005). Organizational governance and employee pay: How ownership structure affects the firm’s compensation strategy. Strategic Management Journal, 26, 377–384.Google Scholar
Yang, H., & Klaas, B. S. (2011). Pay dispersion and the financial performance of the firm: Evidence from Korea. International Journal of Human Resource Management, 22, 2147–2166.Google Scholar
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40, 185–213.Google Scholar