THE MANAGERIAL POWER THEORY OF EXECUTIVE PAY: A CROSS NATIONAL TEST AND EXTENSION.

Abstract

The article discusses executive pay levels and structures, which differ greatly within and across national contexts. These differences remain even after controlling for firm size and performance, and executives' human capital. An account based on managerial power is offered. This managerial power theory (MPT) suggest that if we wish to understand how executive pay levels and structures come about, we should turn our attention to the actual conditions under which pay is set. First, we follow standard MPT by predicting that certain company-level corporate governance features give CEOs and other executives considerable discretion over the pay setting process, such that they can bend it in their favor and extract greater pay from the corporations they lead. Specifically, we will focus on five executive-empowering corporate governance features, notably: CEO/Chair duality, single-tiered boards, employee representation on boards, and the number and proportion of non-executives on board. Since traditional MPT has thus far mainly been tested in the US, the first research question we address in this paper is: Can MPT- predictions be generalized across a broader cross-national sample? Second, we extend standard MPT by building new theory on how certain features of the institutional environment in which the firm is incorporated can further increase (or decrease) executives' discretion over the pay setting process. Relevant influences on executives' control over pay setting processes emanate from the legal, political, economic, and cultural environments in which their firms operate, as well as from the news media. We take on board a broad range of these indicators in order to test our second research question: Are MPT-predictions contingent upon jurisdiction-level institutions?