Academic journal article Administrative Science Quarterly

Substance and Symbolism in CEO's Long-Term Incentive Plans

Academic journal article Administrative Science Quarterly

Substance and Symbolism in CEO's Long-Term Incentive Plans

Article excerpt

Stock options were valued using the following, simplified version of the Black-Scholes (1973) model (Noreen and Wolfson, 1981; Kerr and Kren, 1992):

option value = price x shares x [exp(-dt)N(Z) - exp(-rt) N(Z - s t)],

where

price = the exercise price of an option.

shares = the number of shares granted,

INTRODUCTION

The topic of executive compensation has attracted increased attention from researchers taking economic and behavioral perspectives (e.g., O'Reilly, Main, and Crystal, 1988; Finkelstein and Hambrick, 1989; Tosi and Gomez-Mejia, 1989; Jensen and Murphy, 1990; Zajac, 1990; Beatty and Zajac, 1994). The economics-based research, relying primarily on agency theory (Jensen and Meckling, 1976), emphasizes how contingent compensation contracts for managers that link pay to firm performance can align the interests of chief executive officers (CEOs) and shareholders. The board of directors is responsible for fashioning such contingent contracts and functions more generally to monitor executive behavior (Fama and Jensen, 1983). The inability of empirical studies to demonstrate a consistently significant relationship between CEO pay and firm performance (Kerr and Bettis, 1987; Jensen and Murphy, 1990), however, has led some researchers to explore more behaviorally oriented explanations for the board's apparent failure to fulfill its nominal function. These studies typically focus on the social, political, or psychological aspects of the CEO-board relationship, such as how the CEOs' relative power over board members may influence cash compensation in the form of salary and bonuses (Finkelstein and Hambrick, 1989; Hill and Phan, 1991). The impact of CEO influence on the specific form or composition of CEO compensation contracts, such as long-term incentives versus cash compensation, has received little attention, however, despite the fact that long-term incentives have become an increasingly large proportion of CEOs' total compensation (Jarrell, 1993).

This line of behavioral research has also tended to focus on the overtly political aspects of CEO compensation, emphasizing how powerful CEOs are able to pressure boards into giving them higher levels of cash compensation. While this approach has yielded important insights, we believe that current research can be extended to consider how more subtle aspects of political behavior might affect CEO compensation, such as how the symbolic, rather than substantive aspects of CEO compensation may be politically managed to the advantage of powerful CEOs.

In addition, prior research has given only limited consideration to the implications of institutional theory for executive compensation issues. From an institutional perspective, actual compensation practices may differ from formal arrangements (Meyer and Rowan, 1977). This perspective also suggests that the predictors of whether firms adopt organizational practices like long-term incentive plans may change over time, with technical considerations predicting early adoption and institutional factors predicting later adoption (Tolbert and Zucker, 1983). In effect, institutional theory can be used to complement political theory in developing a symbolic action perspective on CEO compensation.

This paper seeks to address each of the issues raised above by focusing on how long-term incentive compensation, the aspect of CEO pay that has been least researched in the organizational literature, lends itself best to a study of symbolic action. The study focuses on how long-term incentive plans (LTIPs), which have been widely promoted by compensation consultants and writers on executive compensation (Meyers, 1981) as an effective means of aligning CEO pay with shareholder interests, may be used symbolically, rather than substantively.

Long-term Incentive Plans

Corporations adopting LTIPs typically emphasize the role of such plans in aligning the interests of top management with those of the firm's owners. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.