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Group Polarization in Board Decisions About CEO Compensation

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  • David H. Zhu

    (Department of Management, W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

Abstract

This study examines how chief executive officer (CEO) compensation decisions may be influenced by a major group decision-making tendency referred to as group polarization among outside directors. I start by explaining why outside directors on average tend to support relatively high (low) CEO compensation when they previously witnessed relatively high (low) CEO compensation across different boards. Group polarization theory then suggests that when outside directors on average tend to support relatively high (low) CEO compensation prior to board discussions, they will support even higher (lower) focal CEO compensation after the discussions. In addition, this study proposes three important moderators of the group polarization effect. Specifically, (1) demographic homogeneity among outside directors and (2) the similarity of the minority’s prior decision context are proposed to weaken the group polarization effect, whereas (3) outside directors’ power relative to inside directors is predicted to strengthen it. Longitudinal analyses (1995–2006) of Fortune 500 CEOs’ compensation provide support for these theoretical predictions. This study contributes to corporate governance research on CEO compensation by advancing a novel group decision-making approach to examining this important decision.

Suggested Citation

  • David H. Zhu, 2014. "Group Polarization in Board Decisions About CEO Compensation," Organization Science, INFORMS, vol. 25(2), pages 552-571, April.
    • Handle: RePEc:inm:ororsc:v:25:y:2014:i:2:p:552-571
    DOI: 10.1287/orsc.2013.0848
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    4. Kanadlı, Sadi Boĝaç & Torchia, Mariateresa & Gabaldon, Patricia, 2018. "Increasing women's contribution on board decision making: The importance of chairperson leadership efficacy and board openness," European Management Journal, Elsevier, vol. 36(1), pages 91-104.
    5. Sadi Boĝaç Kanadlı & Max Bankewitz & Pingying Zhang, 2018. "Job-related diversity: the comprehensiveness and speed of board decision-making processes—an upper echelons approach," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(2), pages 427-456, June.
    6. Steve Sauerwald & Zhiang (John) Lin & Mike W. Peng, 2016. "Board social capital and excess CEO returns," Strategic Management Journal, Wiley Blackwell, vol. 37(3), pages 498-520, March.
    7. Monomita Nandy & Suman Lodh & Jin Wang & Jaskaran Kaur, 2021. "Does lobbying of firms complement executive networks in determining executive compensation?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4137-4162, July.
    8. Jill A. Brown & Anne Anderson & Jesus M. Salas & Andrew J. Ward, 2017. "Do Investors Care About Director Tenure? Insights from Executive Cognition and Social Capital Theories," Organization Science, INFORMS, vol. 28(3), pages 471-494, June.
    9. Judge, William Q. & Talaulicar, Till, 2017. "Board Involvement in the Strategic Decision Making Process: A Comprehensive Review," Annals of Corporate Governance, now publishers, vol. 2(2), pages 51-169, April.

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