Who wins the tug of war? A comparative study of the influence of board power and CEO power on CEO-TMT pay gap

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Abstract

Extant studies theoretically debate and empirically present inconsistent findings of the factors that influence the CEO-TMT pay gap. In this study, we extend the research of the antecedents of the CEO-TMT pay gap by directly comparing different theoretical predictions regarding the impacts of board power and CEO power on the CEO-TMT pay gap. Conducting dynamic panel analyses with GMM estimator on a sample of 2,117 firm-year observations in the S&P 500 between 2006 and 2013, we empirically test the contrasting predictions regarding the relationships among board power, CEO power, board-CEO power imbalance, and the CEO-TMT pay gap. In turn, we find that board power is negatively associated with the CEO-TMT pay gap and CEO power has the opposite effect. Moreover, the stronger board power against CEO power, the smaller the CEO-TMT pay gap becomes. Our theoretical analyses and empirical investigations contribute to the existing theoretical debate among agency theory, tournament theory, and managerial power theory regarding the determinants of the CEO-TMT pay gap. Consistent with agency theory predictions rather than tournament theory ones, our empirical results suggest that boards are conscientious about the potential negative effects of a larger CEO-TMT pay gap and therefore stronger boards usually do not rely on larger CEO-TMT pay gap to incentivize CEOs. This study also contributes to corporate governance literature by offering new aggregated proxies for board power and CEO power which reflect the multidimensional features of board-CEO relationships.

Keywords: Board Power, CEO Power, CEO-TMT Pay Gap, Agency Theory, Tournament Theory, Comparative Study, Dynamic Panel Analyses

Authors’ individual contribution: Conceptualization — Z.W. and Z.L.; Methodology — Z.W. and Z.L.; Formal Analysis — Z.W.; Data Curation — Z.L.; Writing — Original Draft — Z.W.; Writing — Review & Editing — Z.W. and Z.L.; Supervision — Z.W.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G34, M52

Received: 22.09.2021
Accepted: 13.12.2021
Published online: 15.12.2021

How to cite this paper: Wang, Z., & Li, Z. (2021). Who wins the tug of war? A comparative study of the influence of board power and CEO power on CEO-TMT pay gap [Special issue]. Corporate Ownership & Control, 19(1), 241–256. https://doi.org/10.22495/cocv19i1siart3