Academic journal article Canadian Journal of Administrative Sciences

The Effects of Firm Strategy on the Level and Structure of Executive Compensation

Academic journal article Canadian Journal of Administrative Sciences

The Effects of Firm Strategy on the Level and Structure of Executive Compensation

Article excerpt


Executive compensation has attracted considerable attention over the past few decades. However, a review of the literature suggests a need for more empirical research using different theoretical insights. In this paper, using several theoretical perspectives, we add new insights on the determinants of executive compensation. Using data from a sample of Canadian-based mining firms, we examine and discuss the effects of firm strategy on the level and structure of chief executive ofcer compensation. Areas for future research are also discussed.


Les dernieres decennies ont vu un tres grand nombre de recherches dans le domaine de la remuneration des cadres d'entreprise. Toutefois, la revision des ouvrages publis revele la necessite de nouvelles recherches empiriques utilisant des approches theoriques differentes. A l'aide de diverses approches theoriques nous presentons ici de nouvelles idees sur les determinants de la remuneration des cadres. Employant les donnees tires d'un chantillon d'entreprises minieres canadiennes, nous examinons les effets de la strategie des entreprises sur l'echelle de remuneration et le niveau de salaire des directeurs generaux. Nous discutons aussi des aspects susceptibles de devenir les sujets de recherches futures.

What makes money so fascinating a subject, after all, is the magnificent lack of justice with which it gets distributed. Salaries constitute comedy as the dictionary defines it: instances of "incongruity," "exaggeration carried to the point of the ridiculous.... Money in terms of being "deserved" or even "earned," is a treacherous subject. Zeus is known to have turned himself into a shower of gold, and probably this is the safest way to think of money - as a kind of meteorological accident which falls, like other sorts of rain, upon the just and unjust. (Maddocks, 1979, pp. 1-2) Although the above quote was used some 20 years ago to describe the situation concerning highly paid stars such as "Morris and other fat cats", it appears to describe equally well the current scene relating to executive compensation. Data on compensation paid to executives of publicly held companies are published annually in the United States and Canada. Following publication of these data, it is not uncommon to see headlines in the popular press screaming about the staggering levels of executive pay and the ensuing discussion and commentaries suggesting executive compensation to be more the result of a "comedy" or "meteorological accident" than a systematic and logical process.

Executive compensation also appears to be a treacherous subject to research. Numerous researchers in the U.S. have investigated firm size and firm performance as potential determinants of executive compensation, leading to a voluminous body of literature on the subject (for excellent reviews of this literature, see Gomez-Mejia, 1994; Gomez-Mejia, Paulin, & Grabke, 1995; GomezMejia & Wiseman, 1997). Although of recent origin, Canadian studies of executive compensation too have focussed on the same two potential explanatory variables (Magnan, St-Onge, & Thorne, 1995; McGuire & Dow, 1998; Zhou, 2000). However, this line of research has not proven to be very productive. A relatively recent review of literature concluded that: "it is amazing how little we know about executive pay in spite of the massive volume of empirical work available on this topic" (Gomez-Mejia, 1994, p. 201). There is still need for additional insights and new perspectives from which potential determinants of executive compensation should be investigated.

In recent years, a number of studies emanating from the strategic management/business policy discipline have begun to explore the effects of an organization's strategy on executive compensation (see, for example, Balkin & Gomez-Mejia, 1990; Rajagopalan & Finkelstein, 1992; Veliyath, Ferris, & Ramaswamy, 1994). These studies posit that different organizations tend to use different strategies and, therefore, may use varying criteria that are consistent with their respective strategies to compensate their executives. …

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