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A model of person‐pay interaction: how executives vary in their responses to compensation arrangements

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  • Adam J. Wowak
  • Donald C. Hambrick

Abstract

A wealth of research indicates that both executive characteristics and incentive compensation affect organizational outcomes, but the literatures within these two domains have followed distinct, separate paths. Our paper provides a framework for integrating these two perspectives. We introduce a new model that specifies how executive characteristics and incentives operate in tandem to influence strategic decisions and firm performance. We then illustrate our model by portraying how executive characteristics interact with a specific type of pay instrument—stock options—to affect executive behaviors and organizational outcomes. Focusing on three individual‐level attributes (executive motives and drives, cognitive frame, and self‐confidence), we develop propositions detailing how executives will vary in their risk‐taking behaviors in response to stock options. We further argue that stock options will amplify the implications of executive ability, such that option‐heavy incentive schemes will increase the performance of talented executives but worsen the performance of low‐ability executives. Our framework and propositions are meant to provide a starting point for future theorizing and empirical testing of the interactive effects of executive characteristics and incentive compensation on strategic decisions and organizational performance. Copyright © 2010 John Wiley & Sons, Ltd.

Suggested Citation

  • Adam J. Wowak & Donald C. Hambrick, 2010. "A model of person‐pay interaction: how executives vary in their responses to compensation arrangements," Strategic Management Journal, Wiley Blackwell, vol. 31(8), pages 803-821, August.
    • Handle: RePEc:bla:stratm:v:31:y:2010:i:8:p:803-821
    DOI: 10.1002/smj.839
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    Cited by:

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    3. Davidson, Robert H., 2022. "Who did it matters: Executive equity compensation and financial reporting fraud," Journal of Accounting and Economics, Elsevier, vol. 73(2).
    4. Kashmiri, Saim & Gala, Prachi & Nicol, Cameron Duncan, 2019. "Seeking pleasure or avoiding pain: Influence of CEO regulatory focus on firms' advertising, R&D, and marketing controversies," Journal of Business Research, Elsevier, vol. 105(C), pages 227-242.
    5. Alessandri, Todd M. & Mammen, Jan & Eddleston, Kimberly, 2018. "Managerial incentives, myopic loss aversion, and firm risk: A comparison of family and non-family firms," Journal of Business Research, Elsevier, vol. 91(C), pages 19-27.
    6. Kateřina Jančíková & František Milichovský, 2019. "HR Marketing as a Supporting Tool of New Managerial Staff in Industry 4.0," Administrative Sciences, MDPI, vol. 9(3), pages 1-12, August.
    7. Gada, Viswa Prasad & Goyal, Lakshmi & Popli, Manish, 2021. "Earnouts in M&A deal structuring: The impact of CEO prevention focus," Journal of International Management, Elsevier, vol. 27(1).
    8. Kun Su & Haiyan Jiang & Gary Tian, 2020. "Government's Say‐on‐pay Policy and Corporate Risk‐taking: Evidence from China," Abacus, Accounting Foundation, University of Sydney, vol. 56(4), pages 561-601, December.
    9. Perryman, Alexa A. & Fernando, Guy D. & Tripathy, Arindam, 2016. "Do gender differences persist? An examination of gender diversity on firm performance, risk, and executive compensation," Journal of Business Research, Elsevier, vol. 69(2), pages 579-586.
    10. Weifeng Xu & Qingsong Ruan & Chang Liu, 2019. "Can the Famous University Experience of Top Managers Improve Corporate Performance? Evidence from China," Sustainability, MDPI, vol. 11(24), pages 1-20, December.
    11. Tang, Jianyun, 2017. "CEO duality and firm performance: The moderating roles of other executives and blockholding outside directors," European Management Journal, Elsevier, vol. 35(3), pages 362-372.
    12. Denton Collins & Gary Fleischman & Stacey Kaden & Juan Manuel Sanchez, 2018. "How Powerful CFOs Camouflage and Exploit Equity-Based Incentive Compensation," Journal of Business Ethics, Springer, vol. 153(2), pages 591-613, December.
    13. O'Connell, Vincent & Lee, Jong-Ho & O'Sullivan, Don, 2018. "The influence of CEO equity incentives on licensing," European Management Journal, Elsevier, vol. 36(2), pages 266-277.
    14. Carla D. Jones & Phillip M. Jolly & Connor J. Lubojacky & Geoffrey P. Martin & Luis R. Gomez-Mejia, 2019. "Behavioral agency and corporate entrepreneurship: CEO equity incentives & competitive behavior," International Entrepreneurship and Management Journal, Springer, vol. 15(3), pages 1017-1039, September.
    15. Heinz, Matthias & Khashabi, Pooyan & Zubanov, Nick & Kretschmer, Tobias & Friebel, Guido, 2017. "Heterogeneous Effects of Performance Pay with Market Competition: Evidence from a Randomized Field Experiment," CEPR Discussion Papers 12474, C.E.P.R. Discussion Papers.
    16. Guoli Chen & Raveendra Chittoor & Balagopal Vissa, 2021. "Does nepotism run in the family? CEO pay and pay‐performance sensitivity in Indian family firms," Strategic Management Journal, Wiley Blackwell, vol. 42(7), pages 1326-1343, July.
    17. Fong, Eric A. & Xing, Xuejing & Orman, Wafa Hakim & Mackenzie, William I., 2015. "Consequences of deviating from predicted CEO labor market compensation on long-term firm value," Journal of Business Research, Elsevier, vol. 68(2), pages 299-305.
    18. Chung, Tuck Siong & Low, Angie, 2022. "CEO regulatory focus and myopic marketing management," International Journal of Research in Marketing, Elsevier, vol. 39(1), pages 247-267.
    19. Loureiro, Gilberto & Makhija, Anil K. & Zhang, Dan, 2020. "One dollar CEOs," Journal of Business Research, Elsevier, vol. 109(C), pages 425-439.
    20. Helge Klapper & Markus Reitzig, 2018. "On the effects of authority on peer motivation: Learning from Wikipedia," Strategic Management Journal, Wiley Blackwell, vol. 39(8), pages 2178-2203, August.
    21. Hou, Wanrong & Li, Sali & Priem, Richard L., 2013. "How do CEOs matter? The moderating effects of CEO compensation and tenure on equity ownership in international joint ventures," Journal of International Management, Elsevier, vol. 19(2), pages 138-151.
    22. Tang, Jianyun, 2021. "CEO self-discipline in power use: A key moderator for the effect of CEO power," European Management Journal, Elsevier, vol. 39(5), pages 633-644.
    23. Scott D. Graffin & Timothy D. Hubbard & Dane M. Christensen & Eric Y. Lee, 2020. "The influence of CEO risk tolerance on initial pay packages," Strategic Management Journal, Wiley Blackwell, vol. 41(4), pages 788-811, April.
    24. Cord H. Burchard & Juliane Proelss & Utz Schäffer & Denis Schweizer, 2021. "Bad news for announcers, good news for rivals: Are rivals fully seizing transition‐period opportunities following announcers' top management turnovers?," Strategic Management Journal, Wiley Blackwell, vol. 42(3), pages 579-607, March.

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