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Extending the managerial power theory of executive pay: A cross national test

Jordan Otten () and Pursey P.M.A.R Heugens

MPRA Paper from University Library of Munich, Germany

Abstract: Contextual factors are typically neglected in both theorizing and empirical tests on executive pay. The fast majority of empirical investigations use data from U.S. based firms. Theoretical implications are typically developed, understood and tested on the basis of the U.S. context. However, the U.S. case is not the world wide standard. Pay in other countries is on average considerably lower and have a different pay mix. The puzzle that from the typical use of agency theory can’t be explained is the variance of pay practices that exist not only within countries but also across countries. This paper extends scholars renewed attention to managerial power theory on executive pay. It sets out how and why institutional theory must be included in explanations of executive pay. On the basis of a sample of executive pay packages from 17 different countries we test the theoretical extensions. Results indicate that institutions interact with firm level determinants of executive pay. Explanations for executive pay should therefore account for the variance of pay practices within and across countries. Highlighting that the institutional embeddedness of pay practices play an important role in finding conclusive explanations of current pay practices.

Keywords: Executive compensation; corporate governance; managerial discretion; power; agency theory; institutional theory (search for similar items in EconPapers)
JEL-codes: B52 G28 G34 M10 M52 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-bec and nep-lab
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Published in ERIM Report Series Research in Management ERS-2007-090-ORG (2007): pp. 1-70

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