Academic journal article Journal of Managerial Issues

Managerial Pay Comparisons and Informational Justice during the M&A Integration Process

Academic journal article Journal of Managerial Issues

Managerial Pay Comparisons and Informational Justice during the M&A Integration Process

Article excerpt

Informational justice, which captures the acquiring firm's efforts to justify decisions and procedures, is important to value creation when integrating large, related mergers and acquisitions (M&As), particularly involving two firms of similar size (Ellis et at., 2009). Although evidence exists of the effects of communication in general and informational justice in particular on knowledge transfer, performance, and other outcomes in M&A integration (Graebner, 2004; Ranft and Lord, 2002; Schweiger et at., 1993; Schweiger and DeNisi, 1991), little is known about factors that may facilitate or impede the flow of communication or resulting efforts that create perceptions of informational justice among the top managers and other employees of the two firms.

Equity theory suggests that compensation levels between the top managers of the two firms prior to the M&A may be an important antecedent of informational justice during the integration process (Adams, 1965; Scheer et at., 2003). Pay disparities between managers signal differences in status and worth and may negatively affect the motivation of the acquired firm managers to engage in forthright communication patterns and provide accurate information about their firms. These effects are particularly likely in large, related mergers between similar-sized firms, where the pay comparisons are very salient and disparities are most likely to influence the extent to which the process is managed in a fair way. Although the dysfunctional effects of pay disparities within companies are well-documented (e.g., Bloom, 1999; Cowherd and Levine, 1992; O'Reilly et al., 1988; Shaw et al., 2002; Siegel and Hambrick, 2005; Trevor et al., 2012), no known study has clarified the potentially negative motivational effects of pay disparity comparisons by managers between or across organizations or theorized pay disparity as an antecedent of informational justice in M&A integration. The purposes of this study is to theoretically delineate and empirically examine the effects of managerial pay disparity between the two firms prior to the M&A on informational justice and subsequently on firm performance during the integration effort. This study's theoretical contribution to the M&A and compensation research streams rests in clarifying how pay disparity comparisons across organizations affect managerial motivations, which in turn influence actions that engender perceptions of informational justice during the integration process. The empirical contribution lies in bringing data to bear on the relationships between managerial pay disparity, informational justice, and M&A performance. In doing so, this study utilizes a combination of primary and secondary data from seventy large, related acquisitions involving similar-sized firms.

THEORY DEVELOPMENT AND HYPOTHESIS

The success of an acquisition is largely dependent upon how well the acquirer integrates the acquired firm once the deal closes (Haspeslagh and Jemison, 1991; Jemison and Sitkin, 1986; Ranft and Lord, 2002). In addition, post-deal integration frequently requires substantial change in one or both firms in varied functional areas or business units (Hitt et al., 2001; Shrivastava, 1986). Perhaps, Graebner best articulates the complexity and interdependency of the integration tasks when she describes the process as an "innovation battle with many fronts," (2004: 764) where each front or part of the integration process needs to be individually managed, yet collectively coordinated. Consequently, demands and inherent change during the integration phase can cause high degrees of uncertainty and anxiety for the managers of both firms involved in the deal (Buono and Bowditch, 1989; Marks and Mirvis, 1998).

In addition to these general challenges of any M&A, two additional factors in this study make post-deal integration tasks even more difficult, thus helping to shape the theorizing in the study. …

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