Golden Parachutes: CEOs and the Exercise of Social Influence

By Wade, James; O'Reilly, Charles A.,, III et al. | Administrative Science Quarterly, December 1990 | Go to article overview

Golden Parachutes: CEOs and the Exercise of Social Influence


Wade, James, O'Reilly, Charles A.,, III, Chandratat, Ike, Administrative Science Quarterly


Using an agency theory framework and data on 89 Fortune 500 firms, we assess whether the granting of golden parachutes to chief executive officers is the result of an economically rational process or determined by the social influence of the CEO. While increased takeover risk is associated with a higher incidence of GPs, as predicted by economic theory, CEOs who are able to appoint more outsiders to their board are also more likely to have GPs. These results suggest that both economic and social influence perspectives have merit and that the importance of each may depend on the ownership structure of the firm.

Along with the recent trend in corporate mergers and takeovers have emerged new incentive packages for incumbent management teams as insurance against takeovers. Generally referred to as "golden parachutes" (or GPs), these are contracts between the executive and the employer that provide for additional compensation should a change in control or ownership occur (Krueger, 1985). The magnitude of these payouts can be significant. For instance, ten executives from Primerica recently received $98.2 million as a result of a takeover (Winkler, 1988). Estimates are that approximately 30 percent of the top 250 industrial companies have these, and the proportion is growing rapidly (Adair, 1987). But are golden parachutes a sound idea? Who actually benefits from them, the shareholders or top management? What rationale is used by the board of directors in the decision to grant GPs to management?

Thus far, these issues have generated far more controversy than research. The general argument in favor of GPs is one of aligning incentives between shareholders and management. The logic is that an entrenched management, faced with a takeover bid that may lead to job loss, is likely to resist the offer in order to protect management's jobs, even though such an offer might be in the shareholders' interest (e.g., Jensen and Ruback, 1983). Walkling and Long (1984), for instance, demonstrated empirically that the probability of management resisting a takeover bid is directly related to the takeover's effect on management's personal wealth. Some evidence is also available suggesting that the adoption of a golden parachute is associated with a positive security market reaction (Lambert and Larcker, 1985). From this perspective, GPs provide incentives to management to pay attention to the stockholders' interests and not to the top managers' potential job loss.

But is the decision by the board of directors to award GPs to management solely one dictated by economic rationality? Although the board has the legal right and formal power to hire, evaluate, reward, and fire the chief executive officer (CEO), it has been widely noted that the CEO can also influence the board through persuasion, the selective use of information, control over the agenda, and other tactics designed to influence its deliberations and decisions (e.g., Zald, 1969; Mace, 1971; Mizruchi, 1983; Patton and Baker, 1987). While not possessing formal power over the board, the CEO may be able to exert what social psychologists refer to as "Social influence" (Cialdini, 1984), relying on norms of reciprocity, liking, and social consensus to shape the board's decision making. Consistent with this view, an argument sometimes made in the business press is that boards of directors often rubberstamp management's requests, including providing undeserved compensation such as GPs (e.g., Sherman, 1988). Several studies have suggested that actual relationships between boards and CEOs may be quite different than that assumed in conventional economic theory (e.g., Baker, Jensen, and Murphy, 1988). O'Reilly, Main, and Crystal (1988), for example, have shown that CEO compensation may be strongly affected by social comparison processes operating within the compensation committee. More recently, O'Reilly, Wade, and Chandratat (1990) have extended these findings to show that CEOs may be able to use social influence to affect their compensation. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Golden Parachutes: CEOs and the Exercise of Social Influence
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.