A model of person-pay interaction: How executives vary in their responses to compensation arrangements

Adam J. Wowak, Donald C. Hambrick

Research output: Contribution to journalArticle

81 Scopus citations

Abstract

A wealth of research indicates that both executive characteristics and incentive compensation affect organizational outcomes, but the literatures within these two domains have followed distinct, separate paths. Our paper provides a framework for integrating these two perspectives. We introduce a new model that specifies how executive characteristics and incentives operate in tandem to influence strategic decisions and firm performance. We then illustrate our model by portraying how executive characteristics interact with a specific type of pay instrument- stock options-to affect executive behaviors and organizational outcomes. Focusing on three individual-level attributes (executive motives and drives, cognitive frame, and selfconfidence), we develop propositions detailing how executives will vary in their risk-taking behaviors in response to stock options. We further argue that stock options will amplify the implications of executive ability, such that option-heavy incentive schemes will increase the performance of talented executives but worsen the performance of low-ability executives. Our framework and propositions are meant to provide a starting point for future theorizing and empirical testing of the interactive effects of executive characteristics and incentive compensation on strategic decisions and organizational performance.

Original languageEnglish (US)
Pages (from-to)803-821
Number of pages19
JournalStrategic Management Journal
Volume31
Issue number8
DOIs
StatePublished - Aug 1 2010

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Strategy and Management

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