Academic journal article Quarterly Journal of Business and Economics

Managerial Control and Executive Compensation in the 1930s: A Reexamination

Academic journal article Quarterly Journal of Business and Economics

Managerial Control and Executive Compensation in the 1930s: A Reexamination

Article excerpt

Managerial Control and Executive Compensation in the 1930s: A Reexamination


In a recent article, Stigler and Friedland [14] assess the impact of Berle and Mean's book, The Modern Corporation and Private Property [2], on the field of economics. In the spirit of Berle and Means, the authors test whether a significant relationship exists between the degree of stockholder control and the level of managerial remuneration using data and estimating techniques that were available around the time when the book was publised. They conclude from their statistical results that there is "no clear evidence that the management-dominated corporations differed much from owner-dominated corporations in practices of executive compensation...". [14, p. 259].

This article examines this issue using more recent theoretical developments concerning the determinants of executive compensation. In particular, profit rate is included as an explanatory variable in the regression equation. Ehrenberg and Milkovich [5], among others, point out that a large body of literature exists indicating that the directors of major corporations typically develop compensation packages for their top executives so that the interests of the managers will be aligned with those of the stockholders to some degree. This is generally done by basing various types of compensation (e.g., bonuses, deferred compensation, etc.) on measures of performance (e.g., profit rate). Recent studies such as Santerre and Neum [12] and Dyl [4] have found an inverse relation between stockholder control and executive compensation, after controlling for the profitability of the firm.

Second, and more importantly, this analysis controls for differences in the product market constraint across the various firms in the sample. Economic theory suggests that managers are only free to pursue their own personal interests when some slack exists in both the stockholder and product market constraints. (For example, see Palmer [11].)

This paper reestimates the Stigler and Friedland model using their data for the period 1937-1938 and controls for profitability and the competitiveness of the product market. The empirical results indicate that the degree of stockholder control does influence executive compensation, ceteris paribus. (1)


Following earlier studies (Santerre and Neun [12] and Neun and Santerre [9]) on the relationship between stockholder control and firm performance, this paper relies on continuous data for stock ownership as an appropriate measure for the degree of stockholder control. The Neun and Santerre [9] study on stockholder control and profitability argues theoretically that managers are likely to react incrementally to increasing amounts of stockholder control. Both studies, as well as Glassman and Rhoades [6] and Dyl [4], find empirical support for a continuous relation between stock owner control and the performance of the firm. Stigler and Friedland provide continuous data for stock ownership and also data for executive compensation, assets, and profits for the years 1937-1938 in their appendix.

In order to determine which firms in the sample had some degree of monopoly power, this research draws upon the work of Wilcox [15]. Wilcox's study is chosen because, as Nutter [10] appropriately writes, "The Wilcox monograph is a solid foundation upon which to build" and "no other study of comparable success exists." The Wilcox study, originally published as "Investigation of Concentration of Economic Power" in 1940, is part of a much larger study conducted by the Temporary National Economic Committee. This larger study examines the overall concentration of economic power in the United States during the 1930s. Stigler and Friedland use another part of this larger study (Goldsmith and Parmalee [7]) when they develop their sample.

The Stigler and Friedland sample of 92 firms is dichotomized (with the help of Wilcox's study) according to the degree of competition (monopolistic or competitive) each firm faced in its primary industry during the late 1930s. …

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