The Social-Psychological Perspective on Executive Compensation: Evidence From a Two-Tier Board System

Abstract

This paper investigates whether and how three social-psychological factors − reciprocity, similarity and role experience − affect CEO compensation packages with respect to the levels of total and fixed compensation and the variable proportion of the compensation package. We use evidence from Germany as it is considered a prototype of a two-tier board system. Given the primary roles of the CEO and the chairman of the supervisory board, we especially highlight social-psychological aspects of the above-mentioned relationship and emphasize the mechanisms in the process leading to the final compensation package. Using a hand-collected dataset we find that reciprocity in particular can lead to a compensation package that is more favorable for the CEO. Results on similarity are ambivalent to the extent that similarity is not a universal construct. It is rather that the effects of similarity on CEO compensation − both positive and negative − depend on the dimension of similarity. Finally, the chairman’s role experience also plays an important role in shaping CEO compensation. More specifically, role experience leads to increased variable compensation. Hence, it is worth noting that higher compensation does not seem to be granted unconditionally, although this could be concluded from theory and prior literature. When higher levels of compensation are paid, the increase often stems from an increase in the proportion of variable compensation.