Firm competitive behavior as a determinant of CEO pay: Empirical evidence from the US pharmaceutical industry

Abstract

Purpose

To provide insight, explanation, and empirical evidence into how and why CEOs get paid the amounts that they do.

Design/methodology/approach

This paper blends several methodologies. Using qualitative interviews with several high level managers, it develops a coding listing to capture how pharmaceutical firms compete within their industry. The paper then uses a structured content analysis approach to capture the specific and observable competitive moves that pharmaceutical firms launch.

Findings

Base pay and bonus of the CEO are greater for firms that launch higher volumes of competitive actions. Furthermore, the variety of competitive moves appears to influence a CEO's base salary.

Research limitations/implications

This study has limited external validity since the firms in this sample are all large US pharmaceutical firms. The research implication is that, to date, firm size and past performance were identified as the single greatest predictors of CEO pay. Findings from this study suggest that how a firm behaves in a competitive context is as important as static characteristics of the firm (e.g. size) in predicting CEO pay levels.

Practical implications

Findings of this study begin to inform how directors may arrive at compensation decisions for CEOs. Since governance and CEO pay is becoming a more salient topic, this study suggests that directors can be trained or counseled on how to make more appropriate and refined decisions regarding CEO pay.

Originality/value

This paper employs a unique methodology to arrive at a question that is important, but under‐researched. Namely, we inform audiences who are concerned with how and why CEO's get paid what they do. Because CEO paychecks are a significant organizational expense, more research into how and why CEOs get paid a certain level is important theoretically and practically.

Citation

Offstein, E.H. and Gnyawali, D.R. (2005), "Firm competitive behavior as a determinant of CEO pay: Empirical evidence from the US pharmaceutical industry", Journal of Managerial Psychology, Vol. 20 No. 5, pp. 335-354. https://doi.org/10.1108/02683940510602923