Culture and CEO Compensation
Robert C. Nash
Wake Forest University
Wake Forest University, Schools of Business
Fordham University - School of Business
March 5, 2012
AFA 2013 San Diego Meetings Paper
We present new insights regarding the determinants of the persistent differences in compensation structure across countries. This paper examines CEO compensation in 43 countries over the 1996 to 2009 period and specifically focuses on the additional explanatory power provided by considering how national culture affects contracting decisions. We find that culture matters. We begin by merging elements of the cross-cultural psychology and contracting literatures to identify cultural factors that theory predicts should affect agency conflicts. Since design of compensation structure is one means to address agency conflicts, we expect a relation between culture and contracting. Our empirical analysis confirms that cultural factors (measuring such societal traits as individualism and uncertainty avoidance) are significant determinants of the relative use of equity-based compensation. The cultural factors are strongly significant after controlling for the previously-identified determinants of CEO compensation structure relating to legal environment and firm-specific characteristics. By empirically verifying the strong relation between culture and compensation, we hope to contribute to a more comprehensive understanding of the interaction between informal institutions (e.g., national culture) and corporate decision-making.
Number of Pages in PDF File: 66
Keywords: Executive Compensation, Culture
JEL Classification: G34working papers series
Date posted: March 16, 2012 ; Last revised: December 14, 2012
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