Abstract
Extant studies theoretically debate and empirically present inconsistent findings of the factors that influence the CEO-TMT pay gap. In this study, we extend the research of the antecedents of the CEO-TMT pay gap by directly comparing different theoretical predictions regarding the impacts of board power and CEO power on the CEO-TMT pay gap. Conducting dynamic panel analyses with GMM estimator on a sample of 2,117 firm-year observations in the S&P 500 between 2006 and 2013, we empirically test the contrasting predictions regarding the relationships among board power, CEO power, board-CEO power imbalance, and the CEO-TMT pay gap. In turn, we find that board power is negatively associated with the CEO-TMT pay gap and CEO power has the opposite effect. Moreover, the stronger board power against CEO power, the smaller the CEO-TMT pay gap becomes. Our theoretical analyses and empirical investigations contribute to the existing theoretical debate among agency theory, tournament theory, and managerial power theory regarding the determinants of the CEO-TMT pay gap. Consistent with agency theory predictions rather than tournament theory ones, our empirical results suggest that boards are conscientious about the potential negative effects of a larger CEO-TMT pay gap and therefore stronger boards usually do not rely on larger CEO-TMT pay gap to incentivize CEOs. This study also contributes to corporate governance literature by offering new aggregated proxies for board power and CEO power which reflect the multidimensional features of board-CEO relationships
Highlights
Management and finance scholars have shown increasing interest in the phenomenon of pay differentials between a CEO and other top executives of the firm, i.e., CEO-TMT pay gap (Henderson & Fredrickson, 2001; Bebchuk, Cremers, & Peyer, 2011; Vo & Canil, 2019)
We extend the research of the antecedents of the CEO-TMT pay gap by directly comparing different theoretical predictions regarding the impacts of board power and CEO power on the CEO-TMT pay gap
Consistent with agency theory which assumes that managers tend to pursue their self-interest (Bebchuk, Fried, & Walker, 2002; Bebchuk et al, 2011), Vo and Canil (2019) show evidence that supports a positive relationship between managerial power and the CEO-TMT pay gap
Summary
Management and finance scholars have shown increasing interest in the phenomenon of pay differentials between a CEO and other top executives of the firm, i.e., CEO-TMT pay gap (Henderson & Fredrickson, 2001; Bebchuk, Cremers, & Peyer, 2011; Vo & Canil, 2019). Extant studies theoretically debate the main factors that influence the CEO-TMT pay gap (Henderson & Fredrickson, 2001; Vo & Canil, 2019; Lin, Yeh, & Shih, 2013; Lambert, Larcker, & Weigelt, 1993) and empirically present inconsistent findings (Bebchuk et al, 2011; Henderson & Fredrickson, 2001; Zorn, Shropshire, Martin, Combs, & Ketchen, 2017; Carpenter & Sanders, 2002; Conyon, Peck, & Sadler, 2001; Mueller, Ouimet, Simintzi, 2017). Prior corporate governance studies have extensively analyzed the impacts of the board of directors and CEO on CEO compensation which influences the CEO-TMT pay gap. One stream of research focuses on the effects of the board of directors and documents a negative relationship between board control and CEO compensation in general (Boyd, 1994; Chhaochharia & Grinstein, 2009); and another stream of research emphasizes the impacts of CEO power and mainly reports a positive relationship between CEO power and CEO compensation (van Essen, Otten, & Carberry, 2015; Song & Wan, 2019)
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