International Evidence on the Perception and Normative Valuation of Executive Compensation

Date01 March 2017
DOIhttp://doi.org/10.1111/bjir.12214
Published date01 March 2017
British Journal of Industrial Relations doi: 10.1111/bjir.12214
55:1 March 2017 0007–1080 pp. 112–136
International Evidence on the Perception
and Normative Valuation of Executive
Compensation
Andreas Kuhn
Abstract
This article describes individuals’ perceptions and normative valuations of
executive compensation using comparable survey data for 27 countries for up to
four dierent years. A majority of individuals believe that executives earn more
than they deserve, but there is substantial variation in the perceived as well as
the just level of executive compensation both within and across countries. The
analysis further shows that subjective estimates of executive pay are associated
with objective measures of executive compensation and income inequality, and
that individuals’ perceptionsand normative valuations of executive compensation
are associated with their more general political preferences.
1. Introduction
Compensation among top executives has substantially increased in
recent years. For example, Bebchuk and Grinstein (2005) document that
compensation among chief executives of S&P 500 firms has increased from
$3.7 million in 1993 to $9.1 million in 2003 on average, which corresponds
to a relative increase in compensation within 10 years of about 245 per cent.
However, more recent data on CEOs in S&P 500 firms suggest a flattening in
executive compensation in the 2000s, after the huge increase in compensation
during the 1990s (Murphy 2013). Because the distribution of CEO pay is
highly skewed, simple means may be misleading regarding the compensation
of the average executive. Nonetheless, Clementi and Cooley (2009) find
a similar pattern for median compensation among CEOs of S&P firms.
Moreover, using longer-run data on executive pay for the United States,
Frydman and Saks (2010) show thatthis is indeed a more recent phenomenon
and that median executive compensation was rather flat until the 1970s.1
Andreas Kuhnis at the Swiss Federal Institute for VocationalEducation and Training,University
of Zurich and IZA.
C
2016 John Wiley & Sons Ltd.
Perception and Normative Valuation of Executive Compensation 113
While this recent increase in executive compensation is well documented
empirically, much less is known about individuals’ subjective perceptions
and normative evaluations of top executive compensation. This is somewhat
surprising, given that the issue of executive compensation has attracted
considerable public attention, especially following the latest financial market
turmoil (e.g. McCall 2013).
Among the few studies on the subject, that by Jasso and Meyersson
Milgrom (2008) is especially important because it explicitly focuses on
the fairness of executive pay from individuals’ subjective points of view.
The authors asked MBA students from Sweden and the United States
about their view on the just level of compensation for top executives.
Even within this rather homogeneous sample of business students, they
find that individuals hold widely dierent beliefs about executives’ just
compensation. However, as they rely on a sample of business students, a
very particular group of individuals who likely have specific beliefs about the
just level of executive compensation, their data are unlikely to reveal more
general normative evaluations of executive compensation.2Moreover, while
Jasso and Meyersson Milgrom are able to study how CEO characteristics
influence students’ judgments of the fair level of executive compensation,
their data do not allow them to relate individuals’ subjective estimates of
compensation to objective indicators of inequality (simply because cross-
country data are needed for such a comparison). Complementary findings
come from studies that do not directly (or, at least, not exclusively) focus on
individuals’ subjective estimates of executive compensation. One important
result, documented in both Headey (1991) and Osberg and Smeeding (2006),
among others, is that people tend to grossly underestimate the earnings
of top executives, while they appear to have quite precise perceptions of
low-wage occupations. Moreover, there is a relatively large literature on the
subjective perception and normative valuation of occupational earnings on
a more general level and without an explicit or exclusive focus on executive
compensation. Key results from a first set of studies (e.g. Castillo 2011;
Kuhn 2011; Schneider 2012) are that there is large variation in compensation
estimates across individuals and that a significant, but usually rather small,
fraction of this variation is related to individual-level socio-demographic
factors, such as age, gender and educational attainment. This literature also
documents that there are largedierentials in both perceptions and normative
valuations of wages across countries (e.g. Kelley and Evans 1993; Osberg
and Smeeding 2006), even after controlling for individual-level determinants
(e.g. Andersen and Yaish 2012). Similar data have also been used to study
and explain dierentials in distributional judgements between former East
and West, and to describe how these dierentials have changed over time
(e.g. Blanchflower and Freeman 1997; Kelley and Zagorski 2004; Kuhn 2013;
Schneider and Castillo 2015). These studies are of interest in the present
context mainly because they show that such perceptions are, in principle,
malleable and that the eective level and structure of compensation is, at
least partially, reflected in these perceptions. Finally, there exists evidence
C
2016 John Wiley& Sons Ltd.

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