Local Community's Social Capital and CEO Pay Duration

Abstract

In this study, we examine the impact of social capital surrounding firms’ headquarters on their CEOs’ pay duration, reflected by the vesting periods of the short-term and long-term components in their annual compensation. Our analysis reveals that CEO pay duration increases with the level of social capital in the county in which firms are headquartered. We further find that this effect is more pronounced when CEOs are more likely to be short-term oriented, suggesting that under the influence of local community’s social capital, the board of directors uses longer pay duration to better align CEOs’ interests with long-term shareholder value. Our results are robust to a variety of additional tests and a smaller sample of firms that had relocated their headquarters to communities with a different level of social capital. Overall, our findings are consistent with the view that social capital incentivises firms to be long-term oriented and refrain from short-term opportunistic activities, and this lengthens CEO pay duration.

Keywords: social capital; executive compensation; CEO pay duration

JEL Classification: G30, M12, Z13