CEO political ideologies and pay egalitarianism within top management teams

• DOI: http://doi.org/10.1002/smj.2608
• Author: Matthew Semadeni,M. K. Chin
• Date: 01 August 2017
• Published date: 01 August 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 1608–1625 (2017)

Published online EarlyView 9 December 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2608

Received 1 July 2015;Final revisionreceived 17 October 2016

CEO POLITICAL IDEOLOGIES AND PAY

EGALITARIANISM WITHIN TOP MANAGEMENT

TEAMS

M. K. CHIN1*and MATTHEW SEMADENI2

1Department of Management and Entrepreneurship, Kelley School of Business,

Indiana University, Bloomington, Indiana, U.S.A.

2Department of Management, W. P. Carey School of Business, Arizona State

University, Tempe, Arizona, U.S.A.

Research summary: Weexamine the inuence of CEO and compensation committee liberalism on

top management teams (TMT) pay arrangements. Given that politically liberal individuals tend to

value egalitarianism, we test whether rms with liberal CEOs tend to (1) reduce pay dispersion

among non-CEO executives; and (2) reduce pay gaps between CEO and non-CEO executives,and

whether compensation committee liberalism moderates these relationships.We nd some evidence

of a direct effect of CEO liberalismon TMT pay arrangements as well as some interaction between

CEO and compensation committee liberalism on the pay arrangements. This study provides a

better understanding of the antecedents of TMT pay arrangementsand empirical evidence showing

the inuence of values at the top of organization.

Managerial summary: Do the values of the CEO and compensation committee inuence the pay

of other top managers? Our study provides evidence that political ideology affects top manager

pay. We examine whether CEO liberalism produces more egalitarianpay arrangements among top

managers, and whether the liberalism of the compensation committee affects that relationship.We

nd that CEO liberalism reduces differences in the total pay among top managers, but does not

inuence the difference between CEO total pay and the total pay of top managers. We also nd

that compensation committee liberalism strengthens the negative inuence of CEO liberalism on

differences in total pay among top managers. Finally, we nd that CEO liberalism reduces the

difference between CEO bonus pay and the bonus pay of other top managers. Copyright © 2016

John Wiley & Sons, Ltd.

INTRODUCTION

The question of how top executives1are paid

has drawn the attention of scholars in multiple

Keywords: executive compensation; political ideology;

values; chief executive ofcers;top management

*Correspondence to: M. K. Chin. KelleySchool of Business, Indi-

ana University,1309 E. 10th St., Hodge Hall 3131, Bloomington,

IN 47405, U.S.A. E-mail:chinmk@indiana.edu

1In this study, top executives and TMT members are used inter-

changeably,and they include both CEO and non-CEO executives.

CEO is only referred to as “CEO,” whereas non-CEO execu-

tives are referred to as “other top executives” and “other TMT

members.”

Copyright © 2016 John Wiley & Sons, Ltd.

elds, including economics, nance, sociology, and

management (Devers et al., 2007). Given that top

management team (TMT) members play critical

roles in implementing company strategy (Carpen-

ter, Geletkanycz, and Sanders, 2004; Hambrick and

Mason, 1984) and that compensation is a substantial

motivator inuencing top executives’ attention and

behavior (Cho and Hambrick, 2006; Lawler, 1990),

it is both theoretically and practically important to

understand the determinants of the pay arrange-

ments of these executives, including CEOs and

other TMT members. However,there are some lim-

itations in the previous literature on top executives’

CEO Political Ideologies and Pay Egalitarianism within TMTs 1609

pay. For example, it tends to be focused primarily

on CEO compensation (Devers et al., 2007; Finkel-

stein, Hambrick, and Cannella, 2009), and as a

result, despite the progress of the past decade, there

are still important unanswered questions regarding

the way TMT members share nancial rewards as a

whole (Geletkanycz and Sanders, 2012).

Another important issue is that there are dis-

agreements between the economic (Conyon, Peck,

and Sadler, 2001; Lazear and Rosen, 1981; Main,

O’Reilly, and Wade, 1993) and socio-psychological

(Fredrickson, Davis-Blake, and Sanders, 2010;

Grafn et al., 2008; Wade etal., 2006) perspectives

used to explain the determinants of TMT pay dis-

parity. Namely, two distinct explanations are given

for the same phenomena, generating confusion

about the antecedents of TMT pay structure. We

argue that this discrepancy can be addressed by

examining whether the decision to adopt one man-

agement approach over another is inuenced by the

values of decision makers at the top of a company.

Organizational scholars have acknowledged the

importance of CEOs’ values since Hambrick and

Mason (1984) emphasized CEOs’ values as one

of the key factors affecting their decision-making

processes. Recently, some scholars have empiri-

cally demonstrated that CEOs’ values do inuence

certain organizational outcome, such as corporate

social responsibility prole (Chin, Hambrick, and

Trevino, 2013) and rm’s tax policies (Christensen

et al., 2015). This stream of research regarding

the inuence of CEOs’ values on other organi-

zational practices suggests that variance in TMT

pay arrangements across rms may also result

from CEO’s different personal values. Indeed,

we argue that greater attention should be paid

to the role of values in the context of TMT pay

arrangements given the lack of consensus on the

consequences of TMT pay disparity (Devers et al.,

2007; Geletkanycz and Sanders, 2012). This is

because executives are more likely to rely on what

they value most or the most ideal structure that

they believe will accomplish goals as their job

demands increase (Hambrick, Finkelstein, and

Mooney, 2005) or as they are confronted with

“weak situations” (Mischel, 1997).

In our study, we focus on the role of CEOs in

TMT pay arrangements. While the compensation

committee has the nal authority and responsibil-

ity to approve the TMT pay structure, CEOs are the

ones who evaluate their non-CEO executives. Based

on their assessment, CEOs propose how non-CEO

executives should be paid to compensation commit-

tee. The CEO’s role is enhanced by the fact that

compensation committee members do not have the

same access to information about non-CEO execu-

tives that the CEO does. Previous studies also sug-

gest CEOs are in the position where they can inu-

ence the pay arrangements not only for non-CEO

executives (Grafn etal., 2008; Wade et al., 2006),

but also for themselves (Main, O’Reilly, and Wade,

1995; Pollock, Fischer, and Wade, 2002). Conse-

quently, we argue that the CEO’s inuence should

be included in the examination of the effect of val-

ues on pay disparity for the TMT. As a result,

our examination begins with CEOs by exploring

the inuence of their values on TMT pay arrange-

ments. Then, since compensation committee mem-

bers ultimately approve the CEOs’ recommendation

for non-CEO executive pay, as well as determine

CEO’s pay structure, we test the moderating inu-

ence of compensation committee members’ values

the relationship between CEO liberalism and TMT

pay arrangements.

In particular, we focus on how CEO political

liberalism (or conservatism) inuences the way

TMT members are paid. We argue that political

ideology will shape the way CEOs share nancial

rewards within the TMT. This is based on ndings

from political science and psychology literature

establishing that liberal and conservative individ-

uals have different value systems. Specically,

more liberal individuals espouse the importance

of egalitarianism, whereas more conservatives

hold to free-market principles and favor individual

actions (Clarkson et al., 2015; Jost, 2006; Rasinski,

1987). Accordingly, we posit those CEOs who

lean toward liberalism will tend to generate more

egalitarian TMT pay arrangements by (1) reducing

pay dispersion among other top executives, and

(2) reducing pay gaps between themselves and

other top executives as these actions reect a belief

in egalitarianism. Conversely, more conservative

CEOs will tend to generate more individualism in

TMT pay by (1) allowing for different levels of pay

among other top executives, and (2) establishing

larger gaps in the pay levels between themselves

and other top executives as a means of creating

competition. In addition, we argue that the liberal-

ism of the CEO will be positively moderated by the

liberalism of the compensation committee.

This study has several implications to the TMT

pay literature and upper-echelons theory. To begin,

the results of this study demonstrate that economic

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1608–1625 (2017)

DOI: 10.1002/smj