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strategy and business
 / Spring 2006 / Issue 42(originally published by Booz & Company)


Recent Research

Perhaps more significantly, there were marked differences in company performance leading up to the appointment of men and women, especially when stock markets were down. Companies that placed men on the board at such times tended to do so after a period of relatively stable performance. But women’s appointments often followed several months of poor performance — with these firms underperforming their sector by about 4 percent.

In other words, women are more likely than men to be placed in leadership positions during difficult times — when stock markets are depressed and performance is poor relative to competitors. “Such women,” say the authors, “can be seen to be placed on the top of a ‘glass cliff,’ in that their appointments are made in problematic organizational circumstances and hence are more precarious.”

One explanation is that appointing a woman to the board signals a change in direction. Another, of course, is that such appointments may be poisoned chalices.

A New Take on CEO Pay
Charles A. O’Reilly III ([email protected]) and Brian G.M. Main ([email protected]), “Setting the CEO’s Pay: Economic and Psychological Perspectives,” Stanford GSB Research Paper no. 1912. Click here.

The classic view of CEO pay — called principal-agent theory — regards executive compensation as a lever that boards and shareholders use to make sure that chief executives deliver results.

The trouble is that the relationship between competitive performance and CEO compensation has been extensively studied, but never conclusively linked. Consequently, Charles A. O’Reilly III, Frank E. Buck Professor of Human Resources Management and Organizational Behavior at Stanford Graduate School of Business, and Brian G.M. Main, director of the David Hume Institute at the University of Edinburgh in the U.K., question the usefulness of principal-agent theory in analysis of CEO compensation.

The authors studied data from an executive compensation firm for 306 semiconductor, manufacturing, and retail companies. The data included firm size; performance; and compensation for the CEO, the board of directors, and executives. Using this information, the researchers concluded that the average CEO compensation package of $1.2 million can be broken down in this way: 54 percent can be attributed to standard economic variables, such as performance, and 46 percent to what they call “influence and interaction,” the social and psychological side of power — specifically, the social dynamics of the boardroom.

In particular, the researchers looked at two psychological processes: reciprocity and social influence. Reciprocity is the notion that one good turn deserves another. The authors assessed the weight of this factor by looking at whether the CEO was on the nominating committee; what fees were paid to the head of the compensation committee; and whether, and for how long, the CEO had been on the board before the chair of the compensation committee was appointed.

The research found that the stipend paid to the head of the compensation committee was “strongly related” to the compensation received by the CEO. For every $1,000 that the chairperson of a compensation committee received above the mean stipend for all chairpeople covered by the study, the corresponding CEO’s cash compensation was higher by $1,746.

The second process studied was social influence. “Social influence occurs when the group signals, tacitly or explicitly, what attitudes and actions are appropriate and acceptable and what aren’t,” the authors explained, pointing to the informal power that CEOs routinely exert over their fellow board members. To better understand the power of social influence, the researchers looked at whether the chief executive officer also acted as company chairperson; the number of board committees on which the CEO served; whether the CEO was on the compensation committee; and whether the CEO was older than the chairperson of the compensation committee.

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