Group decision-making and leadership: An experimental examination in an executive compensation scenario

Abstract

There has been concern expressed in the financial press and focus established in the accounting literature over rising levels of executive compensation. Individuals on the compensation committee, a sub-committee of the board of directors, collectively determine executive compensation and are responsible for maintaining the pay-for-performance standard, a concept that warrants further attention. This study examines the process of exaggeration of a group decision over individual beliefs and the impact of leadership upon a committee's outcome when making compensation awards. In an experiment with 98 subjects role-playing as compensation committee members, results show that in a committee of individuals where a coterie and a majority belief is present, group polarization occurs and the compensation results are exaggerated as compared to individual beliefs. The findings also suggest, though, that the appointment of a leader as chair of the committee, either in the majority or minority view, has a moderating effect on the group outcome. These results highlight and add to the literature the potential for agency costs in the group decision process that may be found in the executive compensation-setting environment.