Placing their bets: The influence of strategic investment on CEO pay-for-performance

Wei Shi, Brian L. Connelly, Jeremy D. Mackey, Abhinav Gupta

Research output: Contribution to journalArticle

Abstract

Research Summary: A number of studies examine the extent to which boards compensate CEOs for their firm's performance (i.e., pay-for-performance), but these studies typically do not incorporate what CEOs actually do to bring about those performance outcomes. We suggest that directors will make stronger internal attributions about firm performance when the CEO engages in high levels of corporate strategic investment. CEOs that invest in firm growth essentially “place their bets,” so the pay-for-performance relationship is stronger for them than it is for CEOs who do not invest as much in firm growth. We also theorize and find that directors make internal attributions about firm performance more for prestigious, but not less prestigious, CEOs and more when the directors collectively exhibit conservative, but not liberal, political ideologies. Managerial Summary: Shareholders and other stakeholders often demand that CEOs should be paid for performance. In other words, CEOs should be paid well when the company is performing well and paid less when the company is not performing well. We add an additional dimension: boards might also consider what CEOs actually do to bring about performance outcomes. Our findings suggest that when CEOs make heavy corporate investments, they essentially “place their bets.” In this scenario, boards attribute performance to the CEO so that CEO compensation rises and falls with company performance. When CEOs make fewer corporate investments, their compensation is not as strongly associated with company performance. This primary relationship is particularly true when CEOs have high social recognition or when the directors are collectively conservative.

Original languageEnglish (US)
JournalStrategic Management Journal
DOIs
StatePublished - Jan 1 2019

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Strategic investment
Placing
CEO pay
Chief executive officer
Pay-for-performance
Firm performance
Company performance
Attribution
Firm growth
Corporate investment
Stakeholders
Political ideology
Scenarios
Shareholders
Performance pay
CEO compensation

Keywords

  • attribution theory
  • boards of directors
  • CEO compensation
  • political ideology
  • strategic risk-taking

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

Cite this

Placing their bets : The influence of strategic investment on CEO pay-for-performance. / Shi, Wei; Connelly, Brian L.; Mackey, Jeremy D.; Gupta, Abhinav.

In: Strategic Management Journal, 01.01.2019.

Research output: Contribution to journalArticle

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