Advertisement

Journal of Business Ethics

, Volume 151, Issue 2, pp 295–317 | Cite as

Linking Societal Trust and CEO Compensation

  • Kiridaran Kanagaretnam
  • Abdul-Rahman Khokhar
  • Amin Mawani
Article

Abstract

We examine the association between societal trust and the levels of CEO compensation and the proportion of equity-based compensation of 897 firm-years from 18 countries over the 2007–2013 period. We find both the levels of CEO compensation as well as the proportion of equity-based compensation to be lower in countries with higher levels of societal trust. This suggests that costly regulations on CEO compensation may not be as necessary in jurisdictions with higher levels of societal trust. We also examine the association between pay disparity and societal trust. Consistent with our finding of lower pay at the CEO rank, we find pay disparities are lower in countries with higher levels of societal trust.

Keywords

Trust CEO pay Culture Income disparity 

Notes

Acknowledgments

Funding from the Social Sciences and Humanities Research Council (SSHRC) of Canada is gratefully acknowledged.

References

  1. Ahern, K. R., Daminelli, D., & Fracassi, C. (2012). Lost in translation? The effect of cultural values on mergers around the world. Journal of Financial Economics, 117, 165–189.Google Scholar
  2. Arrow, K. J. (1972). Gifts and exchanges. Philosophy & Public Affairs, 1(4), 343–362.Google Scholar
  3. Arrow, K. J. (1974). The limits of organization. Philadelphia, PA: University of Pennsylvania, Fels Center of Government.Google Scholar
  4. Audi, R. (2008). Some dimensions of trust in business practices: From financial and product representation to licensure and voting. Journal of Business Ethics, 80(1), 97–102.CrossRefGoogle Scholar
  5. Bhattacharya, R., Devinney, T. M., & Pillutla, M. M. (1998). A formal model of trust based on outcomes. Academy of Management Review, 23(3), 459–472.CrossRefGoogle Scholar
  6. Bloom, M. (2004). The ethics of compensation systems. Journal of Business Ethics, 52, 149–152.CrossRefGoogle Scholar
  7. Bottazzi, L., Da Rin, M., & Hellmann, T. F. (2011). The importance of trust for investment: Evidence from venture capital. National Bureau of Economic Research, Working Paper, Cambridge, MA. http://www.nber.org/papers/w16923.
  8. Bradach, J. L., & Eccles, R. G. (1989). Price, authority, and trust: From ideal types to plural forms. Annual Review of Sociology, 15, 97–118.CrossRefGoogle Scholar
  9. Brandes, P., Dharwadkar, R., & Suh, S. (2015). I know something you don’t know! The role of linking pin directors in monitoring and incentive alignment. Strategic Management Journal, 26, 473. doi: 10.1002/smj.2353.Google Scholar
  10. Bratton, W. W., & Blair, M. M. (2003). Restoring trust in America’s business institutions. Georgetown Law and Economics Research Paper, 784526, 05-25.Google Scholar
  11. Bryan, S., Nash, R., & Patel, A. (2010). How the legal system affects the equity mix in executive compensation. Financial Management, 39(1), 393–418.CrossRefGoogle Scholar
  12. Caldwell, C., & Karri, R. (2005). Organizational governance and ethical systems: A covenantal approach to building trust. Journal of Business Ethics, 58, 249–259.CrossRefGoogle Scholar
  13. Castaldo, S., Premazzi, K., & Zerbini, F. (2010). The meaning(s) of trust. A content analysis on the diverse conceptualizations of trust in scholarly research on business relationships. Journal of Business Ethics, 96, 657–668.CrossRefGoogle Scholar
  14. Crawford, S., Nelson, K. K., & Rountree, B. (2014). The CEO–employee pay ratio. SSRN Working Paper. http://ssrn.com/abstract=2529112.
  15. Darley, J. M. (2004). Commitment, trust, and worker effort expenditure in organizations. In R. M. Kramer & K. S. Cook (Eds.), Trust and distrust in organizations: Dilemmas and approaches. New York: Russell Sage Foundation.Google Scholar
  16. Duarte, J., Siegel, S., & Young, L. (2012). Trust and credit: The role of appearance in peer-to-peer lending. Review of Financial Studies, 25(8), 2455–2484.CrossRefGoogle Scholar
  17. Finkelstein, S., & Hambrick, D. C. (1989). Chief executive compensation: A study of the intersection of markets and political processes. Strategic Management Journal, 10(2), 121–134.CrossRefGoogle Scholar
  18. Franke, R. H., Hofstede, G., & Bond, M. H. (1991). Cultural roots of economic performance: A research note. Strategic Management Journal, 12(S1), 165–173.CrossRefGoogle Scholar
  19. Fukuyama, F. (1995). Trust: Social virtues and the creation of prosperity. New York: Free Press.Google Scholar
  20. Greenwood, M., & Van Buren, H. J, III. (2010). Trust and stakeholder theory: Trustworthiness in the organisation–stakeholder relationship. Journal of Business Ethics, 95, 425–438.CrossRefGoogle Scholar
  21. Guiso, L., Sapienza, P., & Zingales, L. (2004). The role of social capital in financial development. The American Economic Review, 94(3), 526–556.CrossRefGoogle Scholar
  22. Guiso, L., Sapienza, P., & Zingales, L. (2008). Trusting the stock market. The Journal of Finance, 63(6), 2557–2600.CrossRefGoogle Scholar
  23. Guiso, L., Sapienza, P., & Zingales, L. (2009). Cultural biases in economic exchange? The Quarterly Journal of Economics, 124(3), 1095–1131.CrossRefGoogle Scholar
  24. Hechter, M., & Opps, K. D. (2001). What have we learned about the emergence of social norms? In M. Hechter & K. D. Opps (Eds.), Social norms. New York: Russell Sage Foundation.Google Scholar
  25. Henderson, A. D., & Fredrickson, J. W. (1996). Information-processing demands as a determinant of CEO compensation. Academy of Management Journal, 39(3), 575–606.Google Scholar
  26. Hofstede, G. H. (1984). Culture’s consequences: International differences in work-related values (Vol. 5). Newbury Park, CA: Sage.Google Scholar
  27. Hofstede, G. H. (2001). Culture’s consequences: Comparing values, behaviors, institutions and organizations across nations. Thousand Oaks, CA: Sage.Google Scholar
  28. Hope, O., Kang, T., Thomas, W., & Yoo, Y. K. (2008). Culture and auditor choice: A test of the secrecy hypothesis. Journal of Accounting and Public Policy, 27(5), 357–373.CrossRefGoogle Scholar
  29. Jasso, G. (2008). A new unified theory of sociobehavioural forces. European Sociological Review, 24(4), 411–434.Google Scholar
  30. Kanagaretnam, K., Lim, C. Y., & Lobo, G. J. (2014). Effects of international institutional factors on earnings quality of banks. Journal of Banking & Finance, 39, 87–106.CrossRefGoogle Scholar
  31. Knack, S., & Keefer, P. (1997). Does social capital have an economic payoff? A cross-country investigation. The Quarterly Journal of Economics, 112(4), 1251–1288.CrossRefGoogle Scholar
  32. Kymlicka, W. (1989). Liberalism, community, and culture. Oxford: Oxford University Press.Google Scholar
  33. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. The Journal of Political Economy, 106, 1113–1155.CrossRefGoogle Scholar
  34. Larcker, D. F., & Tayan, B. (2012). What is CEO talent worth?. Stanford, CA: Rock Center for Corporate Governance—Stanford University.Google Scholar
  35. Larcker, D. F., & Tayan, B. (2013). Trust: The unwritten contract in corporate governance. Stanford, CA: Rock Center for Corporate Governance—Stanford University.Google Scholar
  36. Lopez, J. A. P., & Santos, J. M. S. (2014). Does corruption have social roots? The role of culture and social capital. Journal of Business Ethics, 132, 697–708.CrossRefGoogle Scholar
  37. Margolit, A., & Raz, J. (1990). National self-determination. Journal of Philosophy, 87(9), 439–461.CrossRefGoogle Scholar
  38. Miller, G. J. (2004). Monitoring, rules, and the control paradox: Can the good soldier Svejk be trusted? In R. M. Kramer & K. S. Cook (Eds.), Trust and distrust in organizations: Dilemmas and approaches. New York: Russell Sage Foundation.Google Scholar
  39. Morris, C. W. (1956). Varieties of human value. Chicago: University of Chicago Press.CrossRefGoogle Scholar
  40. Murphy, K. J. (1999). Executive compensation. In O. Ashenfelter & D. Card (Eds.), Handbook of labor economics (Vol. 3, pp. 2485–2563). Amsterdam: North Holland.Google Scholar
  41. Nanda, D., & Wysocki, P. (2011). The relation between trust and accounting quality. Working Paper, University of Miami. http://www.bu.edu/questrom/files/2011/02/Nanda-Wysocki-2011.pdf.
  42. Nichols, D., & Subramaniam, C. (2001). Executive compensation: Excessive or equitable? Journal of Business Ethics, 29, 339–351.CrossRefGoogle Scholar
  43. O’Reilly, C. A, I. I. I., Main, B. G., & Crystal, G. S. (1988). CEO compensation as tournament and social comparison: A tale of two theories. Administrative Science Quarterly, 33(2), 257–274.CrossRefGoogle Scholar
  44. Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22(1), 435–480.CrossRefGoogle Scholar
  45. Pevzner, M., Xie, F., & Xin, X. (2014). When firms talk, do investors listen? The role of trust in stock market reactions to corporate earnings announcements. Journal of Financial Economics, 117(1), 190–223. doi: 10.1016/j.jfineco.2013.08.004.
  46. Reina, D. S., & Reina, M. L. (1999). Trust and betrayal in the workplace: Building effective relationships in your organization. San Francisco: Berrett-Koehler.Google Scholar
  47. Rousseau, D. M., Sitkin, S. B., Burt, R. S., & Camerer, C. (1998). Not so different after all: A cross-discipline view of trust. Academy of Management Review, 23(3), 393–404.CrossRefGoogle Scholar
  48. Sapienza, P., & Zingales, L. (2012). A trust crisis. International Review of Finance, 12(2), 123–131.CrossRefGoogle Scholar
  49. Schilke, O., & Cook, K. S. (2015). Sources of alliance partner trustworthiness: Integrating calculative and relational perspectives. Strategic Management Journal, 36, 276–297.CrossRefGoogle Scholar
  50. Solomon, S. D. (2013, August 27). A simple solution on CEO pay is not so simple. The New York Times.Google Scholar
  51. Sorkin, A. R. (2015, January 26). S.E.C. has yet to set rule on tricky ratio of C.E.O.’s pay to workers. The New York Times.Google Scholar
  52. Starnes, B. J., Truhon, S. A., & McCarthy, V. (2010). Organizational trust: Employer–employee relationships. ASQ Human Development & Leadership Division. http://rube.asq.org/hdl/2010/06/a-primer-on-organizational-trust.pdf.
  53. Tosi, H. L., & Greckhamer, T. (2004). Culture and CEO compensation. Organization Science, 15(6), 657–670.CrossRefGoogle Scholar
  54. Towers Perrin. (1997–2001). Managing global pay and benefits: Worldwide total remuneration. New York: Towers Perrin.Google Scholar
  55. Westerman, J. W., Beekun, R. I., Stedham, Y., & Yamamura, J. (2007). Peers versus national culture: An analysis of antecedents to ethical decision-making. Journal of Business Ethics, 75, 239–252.CrossRefGoogle Scholar
  56. Williams, R. M. (1951). American society: A sociological interpretation. New York: Knopf.Google Scholar
  57. Zak, P. J., & Knack, S. (2001). Trust and growth. The Economic Journal, 111(470), 295–321.CrossRefGoogle Scholar
  58. Zhang, X., Sing, L., & Sun, H. (2013). Individualism–collectivism, private benefits of control, and earnings management: A cross-culture comparison. Journal of Business Ethics, 114, 655–664.CrossRefGoogle Scholar
  59. Zingales, L. (2015). Does finance benefit society? Chicago Booth Research Paper No. 15-09. SSRN: http://ssrn.com/abstract=2585194.

Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  • Kiridaran Kanagaretnam
    • 1
  • Abdul-Rahman Khokhar
    • 2
  • Amin Mawani
    • 1
  1. 1.Schulich School of BusinessYork UniversityTorontoCanada
  2. 2.Sobey’s School of BusinessSaint Mary’s UniversityHalifaxCanada

Personalised recommendations