Gupta and Wowak (2016) studied the relationship between the beliefs of directors - as measured by

how much the directors donated to political parties in the United States of America - and Chief

Executive Officer (CEO) compensation. Their research is summarised in the abstract below:

"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."

Source: Gupta, A. and A. J. Wowak (2016) "The Elephant (or Donkey) in the Boardroom: How

Board Political Ideology Affects CEO Pay", Administrative Science Quarterly, Online Early: 1-30.

 

Required:

(a) Gupta and Wowak's research shows conservative directors strongly believe that firm

performance can be directly attributed to the CEO; this is a form of meritocracy. The

research indicates that liberal directors share this belief, but to a much lesser extent than

conservative directors. What do you think? Briefly discuss the pros and cons (i.e. merits

and problems) of a pay-for-performance philosophy.

 

(b) Imagine you are undertaking similar research in New Zealand, although the subject is not

CEOs but employees in businesses (e.g. working in factories, restaurants, retail stores, etc.).

Briefly explain how the research would vary if you adopted a positivist, interpretivist or

critical research paradigm. Note that in New Zealand, conservative views are associated

with the National Party while liberal views are associated with the Labour Party.

Answer rating: 100% (QA)

a Pros and Cons of PayforPerformance Philosophy Merits 1 Alignment of Interests When compensation is tied to performance CEOs are motivated to work towards the companys success aligning their interest... View the full answer