An Examination of the Effect of CEO Social Ties and CEO Reputation on Nonprofessional Investors’ Say-on-Pay Judgments

Journal of Business Ethics 126 (1):103-117 (2015)

CEO compensation has received much attention from both academics and regulators. However, academics have given scant attention to understanding judgments about CEO compensation by third parties such as investors. Our study contributes to the ethics literature on CEO compensation by examining whether judgments about CEO compensation are influenced by two aspects of a company’s tone at the top—social ties between the CEO and members of the Executive Compensation Committee and the CEO’s Reputation, particularly for financial reporting and disclosures. Although, stock exchanges such as NASDAQ require ECC members to be independent, CEOs still may have social connections to the ECC. In addition, CEOs develop a reputation for the quality of their company’s financial reporting and disclosures. We expect both CEO Social Ties and CEO Reputation to impact say-on-pay judgments, and that fairness perceptions about the CEO compensation will mediate the relationship. We conduct an experiment to test our hypotheses. In this study, we employ a two by two experimental design where we manipulate CEO Social Ties with members of the ECC and CEO Reputation for the quality of financial reporting disclosures . Participants were MBA students who provided a say-on-pay judgment , and judgments about the fairness of the CEO’s compensation. Results indicate that CEO Social Ties affected participants’ say-on-pay judgments, which were fully mediated by their perceptions about fairness of the CEO’s compensation. Further, the CEO’s Reputation also affected participants’ say-on-pay judgments, which were fully mediated by their perceptions about fairness of the CEO’s compensation. Implications for research and public policy are presented
Keywords CEO compensation  Say-on-pay  Executive Compensation Committee  CEO Reputation  CEO Social Ties  Ethics  Distributive fairness  Procedural fairness
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DOI 10.1007/s10551-013-1995-5
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What’s Wrong with Executive Compensation?Jared D. Harris - 2009 - Journal of Business Ethics 85 (S1):147-156.
A Model Capturing Ethics and Executive Compensation.Waymond Rodgers & Susana Gago - 2003 - Journal of Business Ethics 48 (2):189-202.

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