The Influence of Executive Compensation on Employee Behaviors through Precipitation Events

Article excerpt

Amidst the multitude of stories in the popular and trade press recounting the greed of CEOs and top executives, as well as the academic papers discussing the link of pay to performance and other methods for determining CEO pay, authors sparsely mention the influence of CEO pay on workers' morale and behaviors. From 1991 to 2001, rank-and-file wages increased by 36 percent, while pay for CEOs jumped 340 percent (Byrne, 2002; Welch, 2003). While collectively CEO compensation declined 15% in 2007 and 11% in 2008; in 2008, the top 500 executives earned an average of $11.4 million. In 2006, CEOs earned 364 times the pay of the average U.S. worker, down from 411 times in 2005 (Sahadi, 2007). More recently, the former Merrill Lynch chief received $233 million; Countrywide Financial chief received $272 million, including $169 million in stock, even as these companies faced failure. Furthermore, Richard Wagoner of General Motors (GM) received $39 million although the value of GM stock declined 98% during his tenure (Lambert, 2009). According to the Wall Street Journal, many corporate CEOs profited handsomely in 2008, even though their companies and their shareholders fared poorly. For example, Warner Music Group Corporation CEO, Edgar Bronfman Jr., received a $3 million bonus although the company lost $56 million and the value of its stock fell 25% (Dvorak, 2009). Recent limits on executive compensation for firms receiving federal assistance further illustrate concern regarding this issue.

Many empirical studies consider how CEO compensation influences shareholder wealth. According to the classical view, "there is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud" (Friedman, 1962: 81). While this view may be appropriate for short term profit, studies show positive relationships between corporate social responsibility and financial performance (Beurden and Gossling, 2008; Cochran and Wood, 1984; Shen and Chang, 2009). Corporate social responsibility advocates the interests of all stakeholders, including employees, consumers, the community, and the environment (Shen and Chang, 2009). The adherence to the classical view tends to overlook the importance of employees as stakeholders in the firm. Employees are often seen as dispensable and replaceable. In recent years, however, an emphasis has been placed on valuing human resources as a core competence that could lead to a source of sustained competitive advantage (Becker and Gerhart, 1996; Lado and Wilson, 1994; Wright et al., 2001). Because human resources are a valuable component of an organization, it is important to understand issues that may influence employee attitudes, such as morale and justice perceptions, as well as behaviors, such as organizational citizenship behavior and counterproductive workplace behaviors.

The purpose of this paper is to present a conceptual model depicting the influence of justice perceptions related to executive compensation on employees' workplace behaviors. It is proposed that precipitating events, as illustrated by recent corporate scandals, call attention to the excessive nature of executive compensation, resulting in injustice perceptions that influence the on-the-job attitudes and behaviors of employees. The paper includes a review of literature related to executive compensation as well as the integration of relevant theories, such as equity theory and organizational justice. Propositions are offered in order to guide future empirical research. Finally, directions for future research are suggested.

CURRENT ISSUES RELATED TO EXECUTIVE COMPENSATION

The corporate scandals of the past two decades have led to harsh criticism of executive compensation. There is a longstanding debate and a great deal of research on the appropriate method for compensating executives. …