What is it about?
CEOs and top managers often use language in public to influence the perception of investors, analysts, and consumers. Using over 2,000 letters from U.S. CEOs to shareholders, we found that CEOs who cite shareholder value in their letters tend to receive higher annual compensation. After controlling for company size, stock performance, the CEO's tenure and other factors known to affect CEO compensation, we found that CEOs receive an additional $116,000 for every mention of shareholder value per 1,000 words in the letters.
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Why is it important?
How much should a CEO receive as annual compensation? How do we put a dollar value on a manager's competency and achievements? As prior research has suggested, compensation decision is based on social and psychological factors that are open to subjective evaluations and symbolic impressions. Symbols and signals that indicate a manager's espousal of a predominant institutional norm--shareholder value orientation-- create a positive impression and therefore favorably affect the outcome of the assessment about the manager's competency. We argue that by using shareholder-friendly language, CEOs strategically use symbols that favorably affect the boards of directors' perception about the managers and result in a board's decision to award higher compensation.
Perspectives
Shareholder value orientation--the idea that corporations' primary purpose is to maximize shareholder value-- has been prevailing for the past few decades. The primacy of shareholders over other stakeholders might have undermined top managers' power and influence, but paradoxically many CEOs of big companies have been vocal advocates of shareholder value. Our findings show that the CEOs might have financial incentives to do so. By jumping on the shareholder-value bandwagon, CEOs did get a significant compensation boost. As a result, the shareholder value orientation has become firmly established as an institutionalized idea across U.S. companies.
Taekjin Shin
San Diego State University
Read the Original
This page is a summary of: Pay for Talk: How the Use of Shareholder-Value Language Affects CEO Compensation, Journal of Management Studies, July 2016, Wiley,
DOI: 10.1111/joms.12218.
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