Balanced Incentives: The Complex Dynamic Relationship Between Executive Compensation and Organizational Performance
Journal: Modern Economics & Management Forum DOI: 10.32629/memf.v5i3.2364
Abstract
This article examines the multifaceted impact of executive compensation packages on corporate performance, innovation, and ethical conduct. Utilizing agency theory and stakeholder theory, it explores how these packages motivate executives, align their interests with shareholders, and promote broader stakeholder engagement. Well-structured compensation packages enhance executive motivation, reduce conflicts, and foster innovation and social responsibility. Empirical evidence suggests a positive correlation between executive pay structures and firms' innovative output. However, potential pitfalls such as short-termism and unethical behavior necessitate a balanced approach. The study emphasizes the importance of designing compensation packages that drive performance, uphold ethical standards, and align with societal values. Through case studies and empirical research, it advocates for incentivizing executives based on both financial performance and ethical conduct.
Keywords
executive compensation, agency theory, stakeholder theory, corporate performance
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[17]Tharenou, P., Saks, A. M. and Moore, C. (2007) “A Review and Critique of Research on Training and Organizational-Level Outcomes”, Human Resource Management Review, 17(3), pp. 251–273.
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[2]Williams, M., (2022). Elizabeth Holmes and Theranos: A play on more than just ethical failures. Business Information Review, 39(1), pp.23-31.
[3]Berrone, P., Surroca, J. and Tribó, J.A., 2007. Corporate ethical identity as a determinant of firm performance: A test of the mediating role of stakeholder satisfaction. Journal of business ethics, 76, pp.35-53.
[4]Bebchuk, L.A., Cohen, A. and Spamann, H., 2010. The wages of failure: Executive compensation at Bear Stearns and Lehman 2000-2008. Yale J. on Reg., 27, p.257.
[5]Bhagat, S.&Bolton,B.(2014) Financial crisis and bank executive incentive compensation. Journal of Corporate Finance 25 (2014) 313–341.
[6]Bundy, J. and Ndu, I., 2023. An Analytical View on the Theranos Fraud and the Way Forward–An Accounting Perspective. International Journal of Business and Management, 18(1), pp.100-100.
[7]Wheatley, K.K. and Doty, D.H., 2010. Executive Compensation as a Moderator of the Innovation--Performance Relationship. Journal of Business & Management, 16(1).
[8]Deckop, J. R., Merriman, K. K., & Gupta, S. (2006). The effects of CEO pay structure on corporate social performance. Journal of Management, 32(3), 329–342.
[9]Cui, X., Sun, M., Sensoy, A., Wang, P., & Wang, Y. (2022) Top executives’ great famine experience and stock price crash risk.Research in International Business and Finance 59 (2022) 101564.
[10]Flammer, C., 2015. Does corporate social responsibility lead to superior financial performance? A regression discontinuity approach. Management science, 61(11), pp.2549-2568.
[11]Freeman, R.E., Harrison, J.S. and Wicks, A.C.,( 2007). Managing for stakeholders: Survival, reputation, and success. Yale University Press. 51(3), pp.371-406.
[12]Gatzert, N., (2015). The impact of corporate reputation and reputation damaging events on financial performance: Empirical evidence from the literature. European management journal, 33(6), pp.485-499.
[13]Holthausen, R.W., Larcker, D.F. and Sloan, R.G., 1995. Business unit innovation and the structure of executive compensation. Journal of accounting and economics, 19 (2-3), pp.279-313.
[14]Hong, B., Li, Z. and Minor, D., 2016. Corporate governance and executive compensation for corporate social responsibility. Journal of Business Ethics, 136, pp.199-213.
[15]Marginson, D. and McAulay, L., (2008) “Exploring the Debate on Short-Termism: A Theoretical and Empirical Analysis”, Strategic Management Journal, 29(3), pp. 273–292.
[16]Raviva, A.&Ciamarra, E.S.(2013)Executive compensation, risk taking and the state of the economy, Journal of Financial Stability 9 (2013) 55–68.
[17]Tharenou, P., Saks, A. M. and Moore, C. (2007) “A Review and Critique of Research on Training and Organizational-Level Outcomes”, Human Resource Management Review, 17(3), pp. 251–273.
[18]Ozkan, N. (2011) CEO compensation and firm performance: An empirical investigation of UK panel data, European Financial Management, 17, pp. 260-285.
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