The Social-Psychological Perspective on Executive Compensation: Evidence From a Two-Tier Board System
Journal of Business Economics
Posted: 4 May 2020 Last revised: 26 Oct 2021
Date Written: October 25, 2021
Abstract
This paper investigates whether and how social-psychological mechanisms, namely reciprocity and similarity with regard to demographics and experiences, affect CEO compensation packages with respect to the levels of total, fixed, and short- and mid-term compensation as well as the variable proportion of the compensation package. We use evidence from Germany as it is considered a prototype of a two-tier board system. Given the primary roles of both the CEO and the chair of the supervisory board, we especially highlight social-psychological mechanisms in the process leading to the final compensation package. Using a hand-collected sample of non-financial constituents of the German HDAX, we find that reciprocity can lead to a compensation package that is more favorable for the CEO. Results on similarity are ambivalent such that the effects of similarity on CEO compensation − both positive and negative – may depend on the dimension of similarity. Finally, the chair’s CEO experience, both inside and outside the focal company, also plays an essential role in shaping CEO compensation. More specifically, CEO experience in another company is associated with more favorable compensation. In contrast, having a chair that has been CEO at the focal company relates less favorable compensation packages except for when the CEO has also been recruited internally.
Keywords: executive compensation, social-psychological mechanisms, corporate governance, two-tier board
JEL Classification: G30, M52, J33
Suggested Citation: Suggested Citation