Management Accounting Section Midyear Meeting

Corporate Culture and the Design of CEO Compensation Contracts

• In Event: Top Executive Performance and Pay

Abstract

We examine how corporate culture – in the sense of shared beliefs and values – is associated with the design of CEO compensation. While theories and evidence suggest that strong corporate culture can function as a social control and induce interest and preference alignment, it is unclear whether and how strong corporate culture may be related to the design of executives’ incentive compensation. Using a text-based measure of corporate culture, we find that strong corporate culture is associated with lower levels of CEO compensation and lower (higher) percentages of variable (fixed) pay. Further, we find that these associations are driven by the lower levels of equity pay provided by strong-culture firms to their CEOs. We also find that strong-culture firms tend to adopt more non-financial performance measures and be more selective in choosing peer groups. Our paper contributes to the broad, and to date largely separate, literatures on both corporate culture and CEO compensation by providing the first systematic evidence that the strength of corporate culture is an important consideration in understanding differences in the design of CEO incentives across firms.

Authors

• Ruidi Shang, Tilburg University

• Dennis Campbell, Harvard Business School

• Zhifang Zhang, Warwick Business School