附录B
Corporate Governance and Executive Remuneration: A Contingency Framework
Executive Overview
By integrating organizational and institutional theories, this paper develops a contingency approach to executive remuneration and assesses its effectiveness in different organizational and institutional contexts. Most of the executive remuneration research focuses on the principal-agent framework and assumes a universal link between executive incentives and performance outcomes. We suggest a framework that examines executive compensation in terms of its organizational contexts and potential complementarities/ substitution effects between different corporate governance practices at both the firm and national levels. We also discuss the implications for different approaches to executive compensation policy such as ―soft law‖ and ―hard law.‖
Over the past two decades, companies around the world have increasingly moved from a fixed pay structure to remuneration schemes that are related to performance and include a substantial component of equity-based incentives. As a result, research on the economic effects of executive compensation has become one of the hotly debated topics within corporate governance research. As Bruce, Buck, and Main (2005, p. 1493) indicated, ―In recent years, literature on executive remuneration has grown at a pace rivaled only by the growth of executive pay itself.
Most of the empirical literature on executive compensation has focused predominantly on the U.S./U.K. corporate sectors when analyzing organizational outcomes of different components of executive pay, such as cash pay (salary and bonus), long-term incentives (e.g., executive stock options), and perquisites (e.g., pension contributions and company cars). In terms of its theoretical underpinnings, previous research has attempted to understand executive compensation in terms of agency theory and explored links between different forms of executive incentives and firm performance.
This literature is motivated by the assumption that, by managing the principal-agency problem between shareholders and managers, firms will operate more efficiently and perform better. Much of corporate governance research is based on a universal model outlined by principal-agent theory (Fama & Jensen, 1983; Jensen, 1986), and the central premise of this framework is that shareholders and managers have different access to firm-specific information and broadly divergent interests and risk preferences. As a result, managers as agents of shareholders (principals) can engage in self-serving behavior that may be detrimental to shareholders’ wealth maximization. A substantial body of literature is based on this straightforward premise and suggests that, to constrain managerial opportunism, shareholders may use a diverse range of corporate governance mechanisms, including various equity-based managerial incentives that align the interests of agents and principals. As Jensen and Murphy
(1990, pp. 242– 243) observed, ―Agency theory predicts that compensation policy will tie the agent’s expected utility to the principal’s objective. The objective of shareholders is to maximize wealth; therefore agency theory predicts that CEO compensation policies will depend on changes in shareholder wealth.‖ The key metric in effecting positive organizational outcomes is pay-performance sensitivity (Bruce et al., 2005).
However, this ―closed system‖ approach, found predominantly within Anglo-American agencybased literature, posits a universal set of linkages between executive incentives and performance and devotes little attention to the distinct contexts in which firms are embedded. Despite considerable research effort, the empirical findings on these causal linkages have been mixed and inconclusive.For example, empirical studies and metaanalyses of the effects of executive equity-related incentives on financial performance have failed to identify consistently significant effects (see, for example, the surveys and commentaries of Core, Guay, & Larcker, 2003; Daily, Dalton, & Rajagopalan, 2003; Hall, 2003; and Tosi, Werner, Katz, & Gomez-Mejia, 2000). In a more recent critique of agency theory, Aguilera, Filatotchev, Gospel, and Jackson (2008) pointed out its ―undercontextualized‖ nature and hence its inability to accurately compare and explain the diversity of corporate governance arrangements across different organizational and institutional contexts. Similarly, much of the resulting policy prescriptions enshrined in codes of ―good‖ corporate governance rely on universal notions of best practice, which often need to be adapted to the local contexts of firms or translated across diverse national institutional settings (Aguilera & Cuervo-Cazurra, 2004; Aguilera & Jackson, 2003; Fiss &Zajac, 2004).
In this paper we discuss an organizational approach to executive compensation that will better account for the interdependencies of incentive alignment with diverse organizational contexts and institutional environments. Building on research by Aguilera et al. (2008) we suggest that corporate governance aspects of executive compensation outlined by the agency and stakeholder perspectives must capture the patterned variation in corporate governance caused by differences in organizational contexts and their environment. Along these lines, we build on recent studies of corporate governance that have attempted to explainthe dynamic dimensions of corporate governance over the company life cycle (Filatotchev & Wright, 2005), as well as the diversity of corporate governance arrangements across countries (Aguilera & Jackson, 2003; Bruce at al., 2005). Thus, an important task in corporate governance research is to uncover the diversity of arrangements and to understand how the effectiveness of executive remuneration is mediated by its alignment with situational variables (―context‖) arising in diverse organizational contexts and institutional environments (Aguilera et al., 2008).
We suggest a novel contingency-based framework for understanding the governance roles of executive compensation, which we conceptualize in terms of organizational context, complementarity/ substitution between governance factors, and the impact of institutional environments. Organizational context refers to variations in firms’ internal and external strategic resources and specific stages in their organizational life cycle (OLC). For example, older firms in the mature phases of their business life cycle may have a more diversified resource pool and ―professionalized‖ management team. As a result, they may be in greater need of formal incentive alignment mechanisms compared to younger, founder-owned firms in their start-up phase, which may have narrower resource bases and thus higher focus on reputational, capability-related aspects of governance. Organizational context may affect not only potential benefits of executive compensation schemes, but also their costs, such as the direct costs of
equity-based incentives and their indirect effects on managerial behavior and risk taking. These costs will vary for different firms operating in different sorts of environments, so that cost-benefit analyses are rarely universal. Complementarity/substitution refers to the overall ―bundles‖ of corporate governance practices that are aligned with one another and mutually enhance the ability of those practices to achieve effective corporate governance. Here we argue that the effectiveness of executive compensation may depend on the presence of other governance factors, such as high shareholder involvement and board independence. Finally, institutions put a strong emphasis on social embeddedness and path dependence of executive compensation as a governance factor. Executive pay packages must be socially legitimate in relation to prevailing regulatory, normative, and cognitive impacts on organizations. As a result, these societal effects must be reconciled with organizational efficiency (Bruce et al., 2005).
Principal-Agent Dichotomy Versus Organizational Approach to Executive Remuneration
Principal-agent theory dominates research on managerial incentives, and it is primarily concerned with efficiency outcomes of executive compensation schemes from the perspective of shareholders, who invest resources and seek maximum return on their investment. This approach relies on the assumption of ―arm’s-length‖ contracting between shareholders and managers, and self-interested opportunism as a basis of their contracts (Bruce et al., 2005). Thus, besides attracting and retaining a high-quality management team, well-designed incentive schemes should increase corporate productivity and value by better aligning top managers’ interests with those of shareholders (Hall, 2003).
Some studies, however, claim that executives, and particularly CEOs, enjoy positions of power in relation to the design of pay packages and are able to insulate themselves from constraints applied by regulators and shareholders. Self-interested executives may now extract rents by manipulating board structures in their own favor (i.e., by nominating their cronies as board members), subject mainly to an ―outrage‖ constraint applied by the media (Bebchuk & Fried, 2004). The CEO’s pay arrangements, therefore, have less to do with incentive alignment and more to do with the CEO’s self-enrichment or ―skimming‖ (Bertrand & Mullainathan, 2001). The extent to which shareholders’ agency problems are resolved and skimming prevented is typically assessed by associating executive pay with the performance of the firm (Buck & Shahrim, 2005).
Empirical corporate governance research has begun to cast doubt on whether there is a direct and universal link between executive compensation and firm efficiency. Many have begun to question whether this association holds across the multiple variants of agency conflicts (Van den Berghe, Levrau, Carchon, & Van der Elst, 2002); different organizational contexts such as entrepreneurial ventures, initial public offerings (IPOs), and mature firms (Filatotchev & Wright, 2005); and different national settings. Perhaps more important is the fact that the performance impact of executive remuneration appears to differ with respect to the national institutional contexts. For example, studies of executive pay show strong correlations between pay and performance in the United States (Hall, 2003) and relatively lower effects of equity-based incentives in the United Kingdom and Germany (Bruce et al., 2005), whereas executive pay in Japan has no incentive effects (Kubo, 2005).
Meanwhile, studies in organization theory and strategic management suggest a number of alternative views on the governance roles of executive compensation. For example, stewardship theory has relaxed some of the assumptions about managerial behavior found in agency theory, arguing that managers may act as stewards for the good of the organization in situations where only relatively minor conflicts of interests exist (Davis, 2005). Likewise, stakeholder theory recognizes that the effectiveness of corporate governance factors depends on a wider set of firm-related actors and their interactions (Freeman, 1984), although this research has paid relatively less attention to executive incentives.
Despite their differences, a common tendency within these research streams is their reliance on universalistic models of efficiency, which abstract away from important organizational and environmental complexities (Aguilera et al., 2008). In agency theory, the ―undercontextualized‖ approach remains restricted to mostly two actors (shareholders and managers), with little attention to how agency problems may vary across diverse task and resource environments, the life cycle of organizations, or different institutional environments. Although Williamson (1991, p. 277) suggested that transaction costs may be different in different institutional and organizational contexts, he pointed out that mainstream corporate governance research is ―too preoccupied with issues of allocative efficiency . . . to the neglect of organizational efficiency in which discrete structural alternatives were brought under scrutiny.‖ Stewardship and stakeholder theory remove some restrictive assumptions of the agency approach, yet do not provide a comprehensive research framework that links executive incentives with the broader context of different organizational environments.
Following Aguilera et al. (2008) we propose that executive compensation research should adopt a more ―open-system‖ approach, which treats organizational features as being interdependent with the diversity, fluctuations, and uncertainties of their environment, and rejects universalistic ―context-free‖ propositions. In short, an open-system approach emphasizes the importance of examining executive compensation practices within a holistic context rather than as single factors acting in isolation.
The main points of departure between the ―traditional‖ agencybased aproaches to executive compensation and our conceptual framework, which is grounded inorganizational theory and synthesizes various empirical findings through a relatively parsimonious set of constructs. This approach is aimed at better understanding the interdependence between executive remuneration practices and the organizational and institutional environment in which these practices are conducted. These specific constructs are organizational context, complementarity/ substitution with a corporate governance ―bundle,‖ and institutional effects. In short, we claim that the organizational effectiveness of executive incentives does not have a direct and linear effect on performance as suggested by mainstream agency research. This effect is contingent on a number of firm-level and macro factors that are, as a rule, not accounted for in the vast majority of studies. In the following sections we attempt to discuss these important contingency factors and their potential effects on the effectiveness and efficiency of executive compensation schemes.
Organizational Context
Organization theorists have examined how the effect of organizational (―structural‖) characteristics on effectiveness or performance may be mediated or influenced by contextual variables, such as task uncertainty, task interdependence, and organizational dynamics
(Donaldson, 2001; Filatotchev, Toms, & Wright, 2006). Although executive compensation might be considered as a structural governance characteristic within this framework, organization theory has not elaborated with regard to the effectiveness of this form of corporate governance. Here we build on previous research and examine how the effectiveness of incentive mechanisms may be mediated by an important category of organizational contingen-cies, namely the resources and capabilities that shape firms’ interdependencies with different organizational environments (see Aguilera et al.,2008, for a more detailed discussion).
One aspect of resource-related contingencies is grounded in the resource-based view of the firm, which takes into account its resources and capabilities, such as skills, knowledge, and ability to innovate (Barney, 1991). A further aspect of resource- related contingencies comes from resource dependency theory, which suggests that firms will respond to demands made by external actors or organizations upon whose resources they are heavily dependent, but also that organizations may seek to buffer against or minimize that external dependence (Pfeffer & Salancik, 1978). For example, the degree and nature of external finance is likely to influence the demands placed on corporate governance to ensure accountability and incentive alignment. Organizational context considerations thus imply that the role and effects of incentive schemes are likely to differ in ways contingent upon both the external and internal resources that are critical within the context of the firms’ organizational, market, sectoral, or regulatory contexts. In other words, the effectiveness of executive incentives may depend on the firm’s size or age, the phases of growth or decline in the company’s development, and the character of innovation in different markets and sectors, among many other factors (Aguilera et al., 2008). While an organizational perspective rejects the notion of universal best practices (Donaldson, 2001), it also suggests that policy will be more effective if it takes into account the potential diversity of organizational contexts. In short, a one-size-fits-all approach is undesirable.
There is an increasing recognition in management research that the organizational resource base and its interdependence with external environments are not static, but an integral part of organizational dynamics. The application of a contingency-based concept of corporate governance has been developed within an emerging body of research on the life cycle of corporate governance (Filatotchev et al., 2006; Filatotchev & Wright 2005). This literature identifies a number of stages in the development of the firm and links them with changes in the extent and nature of agency conflicts that require governance remedies, including incentive alignment. Corporate governance is viewed here as a dynamic system whereby governance practices may address changing sets of environmental interdependencies throughout the different stages of the OLC, such as start-up, growth, maturity, and decline. Figure 1illustrates this theoretical framework.
Over the OLC stages, firms may evolve from having a very narrow resource base to having a more extensive and heterogeneous resource base. This transition may require at least temporary reliance on external resources. Providers of these external resources create new corporate governance demands to ensure that wealth is not only created but also distributed fairly in terms of each factor provider, whether these are shareholders or other stakeholders. This is reflected in changes in accountability of the firm’s management to external resource providers (Filatotchev et al., 2006).
In the early stages of the OLC (Quadrant 1 of Figure 1), the entrepreneurial firm has a narrow resource base. It is usually owned and controlled by a tightly knit group of
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