Incentive Pay for CEOs in Cooperative Firms

Abstract:     
Cooperative owners have a transactional relationship - as customers or input suppliers - with their firm in addition to their investment relationship. This changes both the incentives and the information that owners have to monitor managerial performance. We argue that this difference reduces the need for cooperative CEOs to receive performance-based pay, relative to CEOs in other kinds of organizations. We conduct 9 interviews of cooperative CEOs to informally test our hypothesis. Although our sample is small, results strongly support our hypothesis: in every case but one, the CEOs we spoke with face a mostly subjective and discretionary pay system. Our results also reveal that, while cooperative CEOs are subject to intense supervision by the board, they enjoy a relative independence in devising firm strategy. This finding is consistent with the notion that cooperative owners may be informationally advantaged on some dimensions (e.g., monitoring diligence), but informationally disadvantaged on others.

Keywords: Cooperatives, executive compensation, incentives, discre- tion in executive pay, agency theory

JEL Classifications: J33, M52, P13

Working Paper Series