CEO reputation and top management team compensation: The moderating role of corporate governance

Abstract

Purpose

The purpose of this paper is to clarify the influence of chief executive officer (CEO) reputation on top management team (TMT) compensation, proposing corporate governance characteristics as a moderator of the relationships between the power of top managers to extract rents and the importance of external signals. The study aims to expand the domain of executive compensation literature by including the role of CEO reputation in the context of non-Anglo-Saxon corporate governance systems.

Design/methodology/approach

The paper opted for a panel methodology for the period 2004-2009, including 534 observations from Spanish listed companies. Data were obtained from several sources. Compensation and governance information was obtained from the Spanish Stock Exchange National Commission; data regarding CEO reputation were obtained from Spanish Corporate Reputation Monitor, and, finally, financial statement was obtained from the OSIRIS database.

Findings

The paper provides empirical insights on the CEO reputation diffusion on TMT compensation, showing different scenarios depending on effectiveness of corporate governance. CEO reputation diffusion on TMT pay is strengthened or weakened by the organizational governance effectiveness. General evidence supports the notion that in countries characterized by an incomplete corporate governance system, boards – and also indirectly the structure of ownership – act as a catalyst for external signs of legitimacy, rather than for the organization's and stakeholders’ interests.

Research limitations/implications

Because of the difficulty in pooling information for a long period from three different sources of data, the number of observations is not very large. Therefore, researchers are encouraged to test the proposed propositions further using other context of corporate governance.

Practical implications

The paper includes implications for the development of effective governance mechanisms which promote an adequate link between the CEO reputation and the TMT compensation, avoiding rent extractions.

Originality/value

The paper contributes to new international evidences regarding relations between top managers’ reputations and compensation. Specifically, it allows reinforcement of the importance of institutional arguments in the understanding of the effectiveness of governance mechanisms in large listed companies.

Citation

Sanchez-Marin, G. and Samuel Baixauli-Soler, J. (2014), "CEO reputation and top management team compensation: The moderating role of corporate governance", Management Decision, Vol. 52 No. 3, pp. 540-558. https://doi.org/10.1108/MD-09-2013-0453