Pay for talk: How the use of shareholder-value language affects CEO compensation

Abstract

Symbols and verbal accounts play important roles in organizations. In this study, we argue that symbols affect the process of executive compensation. The language that signals conformity to a prevailing institutional logic can function as a symbol of managerial competency and organizational legitimacy. Due to the ambiguity and information asymmetry inherent in corporate governance system, directors who set executive compensation are susceptible to such symbolic effects of the language. We therefore argue that top managers’ use of language that is congruent with a prevailing logic leads the directors to evaluate the managers more favorably and to grant a higher level of compensation. We test this argument by analyzing the letters to shareholders from 160 U.S. firms and examine the CEOs’ expression of the shareholder value principle, which is a prevailing model of corporate governance in the United States. We found that the use of shareholder-value language is significantly related to a higher level of CEO compensation, regardless of the actual implementation of shareholder-value strategies or any changes in firm performance. We also found that the effect of shareholder-value language on CEO compensation is stronger when the board is less independent, firm performance is poorer, and shareholder activism is stronger.