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Linking Societal Trust and CEO Compensation

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Abstract

We examine the association between societal trust and the levels of CEO compensation and the proportion of equity-based compensation of 897 firm-years from 18 countries over the 2007–2013 period. We find both the levels of CEO compensation as well as the proportion of equity-based compensation to be lower in countries with higher levels of societal trust. This suggests that costly regulations on CEO compensation may not be as necessary in jurisdictions with higher levels of societal trust. We also examine the association between pay disparity and societal trust. Consistent with our finding of lower pay at the CEO rank, we find pay disparities are lower in countries with higher levels of societal trust.

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Notes

  1. Data limitations on gender, race, ethnicity, and religion in the World Values Survey also prevent us from examining the extent to which subgroup characteristics potentially influence social identities.

  2. Due to data limitations in the Hofstede’s cultural dimensions, we examine only the national community or national culture as the primary influence on the individualism–collectivism measure. However, we acknowledge that collectivism can apply at both the whole-group and subgroup levels and that subgroups made up of gender, race, ethnicity and religion can certainly influence where an individual fits on the individualism–collectivism measure in addition to the influence of an individual’s national culture. Jasso (2008)—for example—elaborates on the collectivism of Groupistas and Subgroupistas.

  3. For example, Hope et al. (2008) operationalize their measure of secrecy (a proxy for anti-trust) as a linear combination of Hofstede’s uncertainty avoidance, power distance, and individualism, implying Hofstede’s dimensions of national culture are somewhat associated with some dimensions of societal trust.

  4. We use dimensions of national culture for two reasons. First, culture is used as an alternate proxy for societal trust (Hope et al. 2008). Second, following Tosi and Greckhamer (2004), we are interested in seeing whether culture is associated with CEO compensation for our sample of firms and countries. Whereas, Tosi and Greckhamer (2004) use country-level averages from Towers Perrin surveys, we use actual firm-level data in our analysis.

  5. The sample period starts from 2007 which is the first year available in Bloomberg for earnings guidance data. Although, Bloomberg reports earnings guidance data for more recent year; however, we limit our sample until 2013 to avoid missing values because of disparity in fiscal year-end month.

  6. WVS Longitudinal 1981–2014 File reports survey from 32 countries. Using Compustat Annual Fundamental File, we identify foreign firms listed in U.S. from these countries. Foreign firms are listed in the U.S. through ADR and Compustat Annual Fundamental File reports the ADR Ratio for such firms. We then use the company ticker for the identified firms to individually search the company in Bloomberg and extract the CEO compensation data over 2007 and 2013 period. This strategy yields a panel of 897 firm-years for 166 unique firms from 18 countries. No firms from 14 of the 32 countries from WVS Longitudinal 1981–2014 are either listed in the U.S. or report compensation data.

  7. We observe high correlations in Table 4 among independent variable raising concerns for multicollinearity. For instance, correlation INDIV-COLLECT and LEGAL measures is 0.56. We run Variance Inflation Factor (VIF) test to rule out this concern. The mean VIF value across several multivariate specifications ranges between 1.26 and 2.04.

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Acknowledgments

Funding from the Social Sciences and Humanities Research Council (SSHRC) of Canada is gratefully acknowledged.

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Authors and Affiliations

  1. Schulich School of Business, York University, Toronto, Canada

    Kiridaran Kanagaretnam & Amin Mawani

  2. Sobey’s School of Business, Saint Mary’s University, Halifax, Canada

    Abdul-Rahman Khokhar

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  1. Kiridaran Kanagaretnam
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Correspondence to Kiridaran Kanagaretnam.

Appendix

Appendix

See Table 13.

Table 13 Definitions of variables
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Kanagaretnam, K., Khokhar, AR. & Mawani, A. Linking Societal Trust and CEO Compensation. J Bus Ethics 151, 295–317 (2018). https://doi.org/10.1007/s10551-016-3211-x

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