Executive compensation: influence and reciprocity effects

Pages106-123
DOIhttps://doi.org/10.1108/ER-04-2016-0076
Published date02 January 2018
Date02 January 2018
AuthorFrans Maloa
Subject MatterHR & organizational behaviour,Industrial/labour relations,Employment law
Executive compensation:
influence and reciprocity effects
Frans Maloa
Department of Industrial and Organisational Psychology,
University of South Africa College of Economic and Management Sciences,
Pretoria, South Africa
Abstract
Purpose The purpose of this paper is to understand the effects of influence and reciprocity as the elements
in the determination of executive compensation.
Design/methodology/approach A purposive sample was drawn, which comprised of 13 respondents
chosen for their expertise relating to the determination of executive compensation in state-owned enterprises
(SOEs). A semi-structured interview guide was used as the data-gathering instrument. A thematic
analysis technique was used for data analysis.
Findings The findings in this study identified three themes resorting under influence as crucial in the
process of determining executive compensation, namely an executives social capital, intellectual capital and
social comparison. Two major themes emerged under reciprocity, namely the pay-performance relationship
and role complexity. Finally, the political-symbolic role emerged as the main theme that described the
relationship between influence and reciprocity.
Practical implications The findings provide a more detailed description of the process involved in
determining executive compensation in SOEs.
Originality/value There has been limited if any, empirical study on the process involved in setting
executive compensation. The limited focus has always been on accounting measures. Incorporating the
socio-psychological view attempts to provide a more comprehensive and conclusive explanation of the
process of determining executive pay in theory and practice.
Keywords Reciprocity, Influence, State-owned enterprises, Executive compensation, Socio-psychology
Paper type Research paper
Introduction
Although research on executive compensation continues to proliferate and determinants of
executive compensation have received substantial attention from both academics and
regulators, there is still no interdisciplinary consensus on the primary forces shaping
observable patterns of executive compensation (Baxamusa, 2012; Shaw and Zhang, 2010;
Tosi et al., 2000; Van Essen et al., 2015). The lack of consensus is most visible between
scholars in economics and finance, who advocate the primacy of market-based explanations
and scholars outside these two disciplines, who have challenged these explanations and
some of their underlying assumptions by highlighting the importance of the power of
socio-psychological processes in the creation of compensation practices (DiPrete et al., 2010).
Prior to this research, there has been limited, if any, empirical study on the process
involved in setting executive compensation. The limited focus has always been on
accounting measures and traditional performance measures such as return on assets, return
on equity or market performance (stock return) as criteria for determining executive
compensation (De Wet, 2012; Li et al., 2013). However, research by Wu and Wu (2010) found
that, except for the return on assets indicator, there is no obvious positive correlation
between executive compensation and other indicators, such as asset convertibility, that
represent cash performance and the stock yield representing the wealth of shareholders.
In particular, the debate on executive compensation focuses primarily on how much
executives are paid (Fleming and Schaupp, 2012; Scholtz and Smit, 2012; Theunissen, 2010)
and less on the process that determines executive pay. However, discourse on executive
compensation needs to focus on socio-psychological processes in the determination of
Employee Relations
Vol. 40 No. 1, 2018
pp. 106-123
© Emerald PublishingLimited
0142-5455
DOI 10.1108/ER-04-2016-0076
Received 13 April 2016
Revised 22 December 2016
2 August 2017
Accepted 3 August 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0142-5455.htm
106
ER
40,1
executive compensation. According to DiPrete et al. (2010), a more conclusive understanding
of executive pay would be achieved by considering executive pay as an outcome of a social
process in which the actors involved have considerable discretion to influence the outcomes.
Branch et al. (2011) capture the social mechanism of pay determination by stating that
the realities that some compensation outcomes are a result of a negotiation as opposed to
a quoted market price must be considered(p. 83). Similarly, Lorsch and Khurana (2010)
contend that for senior executives, the compensation arrangements, in reality, depend
heavily on negotiations between the executive, and usually his attorney, and the
compensation committee and its advisers. These negotiations cover not only the amounts
to be paid but also the form of compensation, as well as the performance metrics, if any,
to which these are to be related (Lorsch and Khurana, 2010). Incorporating the social
and psychologic al views attempts to p rovide a more comprehensive and conclusive
explanation of the process of determining executive pay in theory and practice
(Otten, 2007). In the same way, this study is designed to explore mechanisms of which
the socio-psychological elements of influence and reciprocity are explored in the process of
setting executive compensation.
Influence
A number of studies have demonstrated that executives can increase their pay beyond what
is justified by economic determinants through exercising their influence (OReilly et al., 2014;
Shin, 2013; Van Essen et al., 2015). Many of the empirical and theoretical propositions in
contemporary treatments of influence relate variations in influence to other observable
variables. For example, studies of the factors associated with leadership, the phenomenon of
authority, the persuasion effects of different types of communication content, the formally
defined power structure in an organisation and informal relations in a community all assert
propositions in which influenceis a major variable (March, 1957).
Similarly, in the current study, influence is expressed in terms of the power an executive
possesses. According to Cormier et al. (2016), one can argue that the formal analysis of
power within organisations originates from Maximilian Webers work on bureaucracies.
Weber observes that economic power is the predominant form of power for the modern
capitalist and is derived from economic relations arising from control of the means of
production (i.e. ownership). Such power is socially constructed and manifests itself in
social organisations and networks (Cormier et al., 2016; Lukes, 1974; Stammers, 1999).
As explained by Bebchuk and Fried (2003), managers wield substantial influence over their
own pay arrangements, and they have an interest in reducing the saliency of the amount of
their pay and the extent to which that pay is de-coupled from the managersperformance.
However, several theories could explain this phenomenon of influence with reference to
executive compensation, namely the managerial power theory, the figurehead theory and
the social comparison theory.
Managerial power theory
The managerial power theory argues that executive pay is an outcome of power
relationships and that pay setters and receivers are able to use discretion in the
pay-setting process (Ebert et al., 2008; Otten, 2007). Chen et al. (2011) identified two types
of executive power, namely structural power and prestige power. Structural power, on the
one hand, relates to formal positions within an organisation and increases as executives
move up the hierarchy. The greater an executives structural power, the greater his/her
control over colleaguesactions to pursue self-interests, including obtaining more pay.
On the other hand, prestige power relates to the role of outside directorships and education
as key components of prestige, which could result in executives receiving more pay
(Li et al., 2007). Prestige power also manifests as the executives positional and expert
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compensation

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