Pay for Talk: How the Use of Shareholder‐Value Language Affects CEO Compensation

• Author: Jihae You,Taekjin Shin
• DOI: http://doi.org/10.1111/joms.12218
• Date: 01 January 2017
• Published date: 01 January 2017

Pay for Talk: How the Use of Shareholder-Value

Language Affects CEO Compensation

Taekjin Shin and Jihae You

San Diego State University; Louisiana State University

ABSTRACT The language that signals conformity to a prevailing norm can contribute to the

appearance of managerial competency and organizational legitimacy. We argue that top

corporate managers’ use of language that is congruent with a prevailing norm leads the

boards of directors to evaluate the managers more favourably and to grant a higher level of

compensation. We test this argument by analysing the letters to shareholders from 334 US

firms and examine the CEOs’ expression of the shareholder value principle, which is a

prevailing model of corporate governance in the USA. We found that the use of shareholder-

value language is significantly related to a higher level of CEO compensation and that the

effect of shareholder-value language is greater when shareholder activism is stronger.

Keywords: CEO compensation, shareholder letters, shareholder value, symbolic

management

INTRODUCTION

Management scholars have recently been studying the role of symbolic management in

corporate governance (Fiss and Zajac, 2006; Westphal and Graebner, 2010; Zajac and

Westphal, 2004). Corporate governance provides an excellent context for the study of

symbolic management, primarily because of the inherent characteristics of governance

systems in publicly traded corporations: the separation of ownership and control, the

asymmetry of information, and the potential misalignment of interests between manage-

ment and the owners. The basic premise of this research is that top managers have moti-

vations and abilities to use symbols that create the appearance of corporate

characteristics that are congruent with socially accepted models of good governance.

Drawing on the idea of decoupling in institutional theory (Meyer and Rowan, 1977),

studies have demonstrated that the firms engaging in such tactics do not necessarily

Address for reprints: Taekjin Shin, Department of Management, College of Business Administration, San

Diego State University, 5500 Campanile Drive, San Diego, CA 92182-8238, USA (email: tshin@

sdsu.edu).

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 54:1 January 2017

doi: 10.1111/joms.12218

implement substantive corporate actions that are consistent with said appearance, sug-

gesting that the symbols are decoupled from actual practices (Fiss and Zajac, 2004;

Westphal and Zajac, 1998). Furthermore, there is evidence that symbolic management

of governance-related issues can bring strategic benefits to the firm, such as more

favourable evaluations from external constituencies (Westphal and Graebner, 2010;

Zajac and Westphal, 2004).

In the present study, we examine the contents of verbal accounts as symbols in the

context of corporate governance. Along with other types of symbolic actions such as

status-oriented categorization and the display of physical markers (Elsbach, 2003), lan-

guage is a powerful symbol; it is a system of symbols that human beings create and inter-

pret in every aspect of social and organizational life. Arguably, symbolic actions of

organizations and their leaders are most often transmitted through language. In our

context, we investigate the argument that language that is congruent with a prevailing

model of corporate governance – the shareholder value model – should have a favour-

able impact on the evaluation of executive competencies.

Studies about symbolic management typically focus on capital market participants’

reaction to signals as the outcome. For example, Zajac and Westphal (2004) studied

stock market reaction to the adoption of stock repurchase plans, and Westphal and

Graebner (2010) examined how stock analysts responded to verbal impression manage-

ment by CEOs and the firm’s change in the composition of the board. Surprisingly, little

is known about how symbolic management affects executive compensation. We believe

that executive compensation provides a suitable setting for studying symbolic manage-

ment. Executive compensation is an outcome of an evaluative process, in which the

board of directors (specifically, directors sitting on the compensation committee) assesses

the performance of executive managers and designs appropriate plans to reward them.

As is the case in any kind of personnel evaluation, this process is fraught with ambigu-

ities, uncertainties, and incomplete information (Graffin et al., 2013; March, 1984),

which heighten the evaluators’ need to rely on subjective information including symbols

(Pfeffer, 1981). Moreover, the reality of corporate boards has been far from being the

ideal of vigilant monitors objectively evaluating executive behaviour, leaving ample

room for sociopolitical and psychological influences (Bebchuk and Fried, 2004; West-

phal, 1999). In the contemporary US context where executive compensation has

become a contentious issue, symbols can potentially play a significant role in creating

and assessing the legitimacy of corporate leadership (O’Reilly and Main, 2010; Wade

et al., 1997). Research suggests that boards’ decisions about CEO compensation award

are favourably affected by symbolic actions that signal conformity to socially desirable

norms or expectations (Staw and Epstein, 2000; Yeung et al., 2011). In the present

study, we argue that CEOs who use shareholder-value–oriented language more fre-

quently are more favourably evaluated by corporate constituencies, including boards of

directors, and therefore receive a higher level of compensation, compared to CEOs who

use the shareholder-value language less frequently.

Studying executive compensation as an outcome of symbolic management has a

unique theoretical significance. This approach facilitates a tighter integration of

strengths from two seemingly disparate perspectives: the agency-theoretic view and insti-

tutional theory. The agency theory is based on a fundamental premise about human

89Shareholder-Value Language and CEO Compensation

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies