The effect of CEO incentives on deviations from institutional norms in foreign market expansion decisions: Behavioral agency and cross‐border acquisitions

• Author: Geoffrey P. Martin,Grigorij Ljubownikow,Luis R. Gomez‐Mejia,Mirko H. Benischke
• Published date: 01 September 2020
• Date: 01 September 2020
• DOI: http://doi.org/10.1002/hrm.22006

ORIGINAL ARTICLE

The effect of CEO incentives on deviations from

institutional norms in foreign market expansion decisions:

Behavioral agency and cross-border acquisitions

Mirko H. Benischke

1

| Geoffrey P. Martin

2

| Luis R. Gomez-Mejia

3

|

Grigorij Ljubownikow

4

1

Department of Strategic Management and

Entrepreneurship, Erasmus University,

Rotterdam School of Management, Rotterdam,

The Netherlands

2

Department of Business Administration,

University of Melbourne, Melbourne Business

School, Melbourne, Victoria, Australia

3

W.P. Carey School of Business, Arizona State

University, Tempe, Arizona

4

Department of Management and

International Business, University of Auckland

Business School, Auckland, New Zealand

Correspondence

Mirko H. Benischke, Erasmus University,

Rotterdam School of Management,

Department of Strategic Management and

Entrepreneurship, Burgemeester Oudlaan 50,

Rotterdam 3042 NA, The Netherlands.

Email: benischke@rsm.nl

Abstract

CEO incentives have been the subject of great interest for human resource scholars.

We explore the institutional context within which the CEO makes sense of their

incentives. Our theory suggests that CEO equity incentives interact with institutional

norms to influence foreign market entry choices. Specifically, we argue that CEOs will

weigh the risk bearing created by equity incentives, along with the consequences of

legitimacy loss, when deciding whether to deviate from institutional norms when

internationalizing. In doing so, we advance human resource literature by demonstrat-

ing that CEO responses to incentives are influenced by institutional norms and that

CEOs' decisions to deviate from institutional norms are shaped by their incentives.

We find support for our framework in the analysis of the stake taken by acquirers in

4,184 cross-border acquisitions.

KEYWORDS

agency theory, CEO compensation, compensation and benefits, institutional theory

1|INTRODUCTION

Human resource management (HRM) professionals and academics

have long been interested in understanding the effect of CEO incen-

tives on firm behaviors (e.g., Aguinis, Martin, Gomez-Mejia, Boyle, &

Joo, 2018; Benischke, Martin, & Glaser, 2019; Bragaw & Misangyi,

2017; Seo, 2017; Sung, Choi, & Kang, 2017; Wang & Singh, 2014;

Werner & Ward, 2004). Within this body of research, an increasing

number of human resource scholars have explored the relationship

between CEO incentives and multinational corporations (MNCs) for-

eign market expansion decisions (e.g., Datta, Musteen, & Herrmann,

2009; Gomez-Mejia & Welbourne, 1991; Jaw & Lin, 2009; Levy,

2005; Su, Fan, & Rao-Nicholson, 2017). For example, Musteen, Datta,

and Herrmann (2009) show that CEOs are more likely to select

full-control entry modes as the proportion of their compensation that

is tied to firm long-term performance increases. Similarly, Woo (2019)

finds that CEO equity-based compensation is positively related to the

likelihood that new ventures internationalize early. The view that has

emerged from this literature is that internationalization decisions can

be explained by CEO incentives that are designed by the board and

HRM professionals (Gomez-Mejia & Wiseman, 2007; Gomez-Mejia,

Wiseman, & Johnson, 2005).

Although this stream of research has produced important insights,

little is known about how the embeddedness of the CEO in a particu-

lar social or institutional context influence foreign market expansion

decisions in response to incentives. In fact, the literature on the effect

of CEO incentives on MNC internationalization decisions has devel-

oped almost independently from a large body of research that con-

siders how institutional forces influence MNCs' foreign market entry

mode decisions (e.g., Salomon & Wu, 2012;Yiu & Makino, 2002). Spe-

cifically, while HRM scholars have primarily focused on studying how

CEO incentives influence the choice between, for example, full control

or shared control entry modes (e.g., Musteen et al., 2009), institutional

scholars haveshown that MNCs often succumbto host country institu-

tional pressures when expanding abroad (e.g., Ang, Benischke, & Doh,

2015; Lu, 2002). This has resulted in an incomplete understanding of

DOI: 10.1002/hrm.22006

Hum Resour Manage. 2020;59:463–482. wileyonlinelibrary.com/journal/hrm © 2020 Wiley Periodicals, Inc. 463

how CEO incentive structures influence MNCs' internationalization

strategies. An important yet unanswered question is: Do CEO incen-

tives influence how the firm responds to institutional pressure in for-

eign market entry mode decisions? This question is allthe more critical

considering thatprior research has started to document that MNCs do,

in fact, increasingly deviate from local norms; but we lack insight into

why deviationsarise (e.g., Regner & Edman, 2014).

In this study, we seek to address the aforementioned question by

combining insights from institutional theory in its sociological form

(DiMaggio & Powell,1983) and the most recent HRM literature explor-

ing CEO incentives using behavioral agency literature (e.g., Martin,

Washburn, Makri, & Gomez-Mejia, 2015; Martin, Wiseman, & Gomez-

Mejia, 2016; Zolotoy, O'Sullivan, Martin, & Veeraraghavan, 2018). In

particular, we arguethat equity incentives influence CEO responses to

institutional pressures in MNCs foreign market expansion decisions;

yet that these incentives are not always consistent with institutional

conformance pressures. Our guiding premise is based on predictions

from the behavioral agency model (BAM; Denya, Gomez-Mejia,

DeCastro, & Wiseman, 2005; Wiseman & Gomez-Mejia, 1998),

suggesting that loss averse CEOs take less risk as they accumulate

equity wealth. In the context of our study, this insight suggests that

CEOs weigh the potentiallosses of current personal wealth when mak-

ing foreign market entry mode decisions, suppressing the perceived

need to conform to institutional norms. In other words, we propose

that CEOs' concern for the preservation of equity wealth can make

them less likely to conform to local institutional norms, and this influ-

ences their foreignexpansion decisions.

We test our hypotheses by analyzing the impact of CEO incen-

tives on decisions regarding equity ownership alternatives in cross-

border acquisitions. This context allows us to operationalize institu-

tional pressures and observe CEO responses to both institutional

pressure (Chan & Makino, 2007) and their incentives. As such, our

empirical context also connects with a stream of HRM research

exploring the role of CEO incentives in acquisition activities (Rich &

Bush, 1987), including cross-border acquisition integration challenges

(Bagdadli, Hayton, & Perfido, 2014; Khan, Rao-Nicholson, Akhtar, &

He, in press) and implications of cross-border acquisitions for HRM

systems (e.g., Cooke & Huang, 2011; Yahiaoui, Chebbi, &

Weber, 2016).

Based on the analysis of 4,184 cross-border acquisitions, we find

general support for the prediction that foreign market entry decisions

result from a combination of both CEO incentives and institutional

norms. The literature on compensation strategy goes back a few

decades (e.g., Balkin & Gomez-Mejia, 1987, 1990; Gomez-Mejia,

1992; Gomez-Mejia, McCann, & Page, 1985), yet most of this

research has circumvented the issue of foreign expansion decisions in

response to institutional pressures and the focus has generally been

restricted to the effect of CEO incentives on the choice between a

given set of entry modes. Our study shifts the theoretical focus to

studying how CEO incentives influence MNC's conformance strate-

gies. Specifically, our study suggests that CEO incentives can lead to

less institutional conformity when MNCs are expanding abroad. This

perspective not only contrasts prior findings that CEO incentives may

reinforce existing institutional norms (Berrone & Gomez-Mejia, 2009)

but also draws attention to an interesting decision-making dilemma to

which HRM researchers have paid limited attention: under which con-

ditions are CEOs willing to trade personal benefits for firm-level legiti-

macy gains? By doing so, our study also adds a new dimension to the

emerging stream of literature (e.g., Rathert, 2016; Regner & Edman,

2014; Tsui & Moellering, 2010) that seeks to explain heterogeneous

MNC responses to institutional pressures—instead of conformance

strategies—by introducing a CEO-centric (HRM) explanation of devia-

tions from the norm.

2|THEORETICAL BACKGROUND AND

HYPOTHESES

The role of the CEO has long been of interest to HRM professionals

and academics (e.g., Gomez-Mejia, 1994; Gomez-Mejia, Tosi, &

Hinkin, 1987; Gomez-Mejia & Wiseman, 2007; Patel, Li, Triana, &

Park, 2018). Within this literature, two dominant research streams can

be identified (Koyuncu, Hamori, & Baruch, 2017; Wang, Holmes,

Oh, & Zhu, 2016). One set of literature has focused on the effect of

CEO demographic characteristics on firm outcomes, including interna-

tionalization decisions. These studies are mainly grounded in upper

echelons theory (Hambrick & Mason, 1984) and argue that CEO char-

acteristics direct the attention, selection and interpretation of envi-

ronmental stimuli which should in return be reflected in the firm's

internationalization decisions (e.g., Benson, Perez-Nordtvedt, & Datta,

2009; Herrmann & Datta, 2006; Isidor, Schwens, & Kabst, 2011;

Jaw & Lin, 2009; Kunisch, Menz, & Cannella Jr., 2019; Le & Kroll,

2017; Su et al., 2017). Another stream in the HRM literature has

examined how CEO incentives influence internationalization deci-

sions. Most of these studies adopt an agency perspective, suggesting

that CEO incentives can explain strategic risk taking behavior—and

therefore firm internationalization decisions (e.g., Gomez-Mejia, 1988;

Musteen et al., 2009; Sanders & Carpenter, 1998; Woo, 2019). In par-

ticular, these studies tend to argue that increases in equity compensa-

tion align the CEO's risk preference with those of shareholders,

resulting in the adoption of higher risk entry modes (e.g., Hou, Li, &

Priem, 2013; Musteen et al., 2009).

Yet, while prior HRM literature has clearly demonstrated the

important role of CEO incentives in influencing firms' strategic

choices, including foreign market expansion strategies, most of these

studies have paid limited attention to the social or institutional con-

text in which these decisions are made (Zolotoy et al., 2018). This is,

among others, reflected in the dominant approach in prior HRM litera-

ture to link CEO incentives to the choice between a given set of for-

eign market entry modes (e.g., Musteen et al., 2009). This approach,

however, is problematic because priorresearch studying MNC strategy

through an institutional lens has documented the influence of institu-

tional pressures on MNCs'internationalization strategies. For example,

Yiu and Makino (2002) show that host country institutions influence

MNCs' entry mode decision (see also Ang et al., 2015; Powell & Rhee,

2016; Xia, Tan, & Tan, 2008). In this regard, institutional scholars

464 BENISCHKE ET AL.