Date of Award
Doctor of Business Administration (DBA)
Dr. Dana Hermanson
Dr. Jeffrey Cohen
Dr. Audrey Gramling
This paper uses an experimental research design to examine the influences of social capital, source credibility, and fairness on the decision making process of compensation committee members when making an executive compensation decision as well as whether an expectation gap exists between the committee members and nonprofessional investors regarding the judgment. One hundred and one public company compensation committee members and ninety nine nonprofessional investors completed an executive compensation case indicating their support on a scale of 0 to 100 of revising executive incentive pay financial performance targets mid-compensation cycle.
I find outcome fairness to shareholders and management significant influences on compensation committee member judgments. In addition, I found more experienced compensation committee members had less support for the compensation proposal. I found a surprising expectation gap between nonprofessional investors and compensation committee members as the members held the CEO more accountable for financial performance than the nonprofessional investors. In addition, I found marginal support that the nonprofessional investors were influenced by the manipulated influences of social capital and source credibility whereas the compensation committee members were not influenced.
Overall, my results indicate that the compensation committee members are not under the undue influence of the CEO but consider pay for performance and shareholder fairness as their top influences on executive pay decisions. My results provide preliminary evidence that compensation committee members should further improve communication with shareholders and other stakeholders regarding the rationale for their decisions including information about the consideration of fairness in their judgments.