Managerial discretion and executives' compensation

Abstract

Purpose

The purpose of this paper is to identify the reasons for the differences of executives' compensation across industries from the managerial discretion perspective.

Design/methodology/approach

Based on the data from 37 manufacturing industries from 2002 to 2007 in China, managerial discretion for each industry is calculated regarding to the conception raised by Hambrick and Finkelstein which is further clustered into three groups. Then, regression model is used to testify the relation between managerial discretion and executives' compensation.

Findings

The executives' compensation is positively related to managerial discretion that is determined by the industrial environment. In the faster growing or higher competing industries, the executives tend to have more managerial discretion, thus they will be better paid due to the extensive latitude of their decision making.

Research limitations/implications

To a certain extent, managerial discretion can be taken to measure the uncertainty or marginal productivity of the executives' work. From the industrial perspective, there are actually some factors far beyond the control of executives but influencing their pay.

Practical implications

When designing the compensation system for the executives, the industrial factors surely should be taken into consideration, to work out a fair and competitive incentive plan.

Originality/value

The paper proves a very important point in the issue of the decisive factors for executives' compensation. Managerial discretion raises the uncertainty and complexity to executives' work, thus it determines the compensation.

Citation

Jing, R., Wan, Y. and Gao, X. (2010), "Managerial discretion and executives' compensation", Journal of Chinese Human Resource Management, Vol. 1 No. 1, pp. 17-30. https://doi.org/10.1108/20408001011051188