How much does directors’ political ideologies impact CEO compensation? Perhaps more than you might think–according to a recent paper published in Administrative Science Quarterly, entitled “The Elephant (or Donkey) in the Boardroom: How Board Political Ideology Affects CEO Pay” from authors Abhinav Gupta and Adam J. Wowak, conservative and liberal boards differ in not only how much they pay CEOs, but how they adjust CEO compensation based upon company performance. The abstract for the paper:
We examine how directors’ political ideologies, specifically the board-level average of how conservative or liberal directors are, influence boards’ decisions about CEO compensation. Integrating research on corporate governance and political psychology, we theorize that conservative and liberal boards will differ in their prevailing beliefs about the appropriate amounts CEOs should be paid and, relatedly, the extent to which CEOs should be rewarded or penalized for recent firm performance. Using a donation-based index to measure the political ideologies of directors serving on S&P 1500 company boards, we test our ideas on a sample of over 4,000 CEOs from 1998 to 2013. Consistent with our predictions, we show that conservative boards pay CEOs more than liberal boards and that the relationship between recent firm performance and CEO pay is stronger for conservative boards than for liberal boards. We further demonstrate that these relationships are more pronounced when focusing specifically on the directors most heavily involved in designing CEO pay plans—members of compensation committees. By showing that board ideology manifests in CEO pay, we offer an initial demonstration of the potentially wide-ranging implications of political ideology for how corporations are governed.
You can read “The Elephant (or Donkey) in the Boardroom: How Board Political Ideology Affects CEO Pay” from Administrative Science Quarterly free for the next two weeks by clicking here. Want to stay up to date on all of the latest research published by Administrative Science Quarterly? Click here to sign up for e-alerts!
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