An institution-based view of executive compensation: A multilevel meta-analytic test

Marc van Essen, Pursey PMAR Heugens, Jordan Otten () and J (Hans) van Oosterhout
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Marc van Essen: Faculty of Law, Economics and Governance, Utrecht University, Utrecht, The Netherlands
Pursey PMAR Heugens: Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands
J (Hans) van Oosterhout: Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands

Journal of International Business Studies, 2012, vol. 43, issue 4, 396-423

Abstract: We offer a multilevel meta-analytic study of the firm performance – executive compensation relationship, comprising prior tests derived from 332 primary studies nested in 29 countries. Although our work modestly supports the optimal contracting theory-based expectation that compensation is positively associated with performance, it also reveals considerable cross-country variability in this relationship. We trace this variance to differences in the level of development of the formal and informal institutions protecting investors against managerial overcompensation and underperformance. In terms of intentionally devised and enforced formal institutions, we find significant positive moderating effects on the focal relationship of the rule of law and strength of investor protection variables. For self-enforcing informal institutions, we find similar effects for concentrated ownership and compensation-related entries in codes of good corporate governance. We also find that formal and informal institutions function in a complementary manner in shaping the performance sensitivity of executive compensation. The focal relationship becomes stronger when concentrated owners have access to well-functioning courts, and when informal norms of good governance are supported by shareholder protection laws. Our study thus suggests that optimal contracting theory must be supplemented with an institution-based view, to account for the conditioning effects of institutions on national contracting environments.

Date: 2012
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