The Ethical Dimension of Equity Incentives: A Behavioral Agency Examination of Executive Compensation and Pension Fundin
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ORIGINAL PAPER
The Ethical Dimension of Equity Incentives: A Behavioral Agency Examination of Executive Compensation and Pension Funding Geoffrey P. Martin1 · Robert M. Wiseman2 · Luis R. Gomez‑Mejia3 Received: 4 July 2018 / Accepted: 22 February 2019 © Springer Nature B.V. 2019
Abstract We draw on the behavioral agency model to explore the ethical consequences of CEO equity incentives. We argue that CEOs are more concerned with funding pension plans when they have more to gain from their stock options yet will increasingly underfund employee pension funds as their current option wealth increases. Our findings reveal that both effects hold when the CEO has greater power (also occupying board chair) over firm decision making. Our study suggests that there is an ethical dimension to equity incentives, given they are intended to align CEO interests with shareholders, yet potentially incentivize CEO behaviors with adverse consequences for employees. Insights from our findings provide boards and regulators with behavioral levers to protect employee well-being in the context of pension funding. Keywords Ethical decision making · Incentives · Stakeholder agency · Executive compensation · Pension funding · Behavioral agency
Introduction Rarely have the ethical consequences of executive decision making for the broader community been in sharper focus. In an environment where business leaders are being asked to justify their social license to operate by demonstrating commitment to local employment and other needs of their employees, a stakeholder approach to management and CEO agency has been thrust back into the spotlight of business academia (Jones et al. 2016; Mitchell et al. 2016). In this context, a nascent yet underdeveloped approach to agency theory adopts a broader stakeholder perspective by recognizing that the firm consists of a nexus of contracts with various * Geoffrey P. Martin [email protected] Robert M. Wiseman [email protected] Luis R. Gomez‑Mejia luis.gomez‑[email protected] 1
Melbourne Business School, University of Melbourne, Carlton, VIC 3053, Australia
2
Eli Broad College of Business, Michigan State University, East Lansing, MI 48824‑1122, USA
3
Department of Management, WP Carey School of Business, Arizona State University, Tempe, AZ, USA
stakeholder groups, each with potentially conflicting goals and risk preferences (Hambrick et al. 2008; Hill and Jones 1992; Mitchell et al. 2016; Werder 2011). According to a stakeholder agency perspective, the firm consists of a nexus of incomplete contracts with the potential for self-serving and unethical behavior by any of these groups (Alchian and Demsetz 1972; Hill and Jones 1992). Management are “the only group of stakeholders who enter into a contract with all other stakeholders” (Hill and Jones, p. 192) meaning that management decisions are likely to affect a broad range of stakeholders who are vulnerable to their opportunism or the trading-off of their interests, to serve other more powerful stakeholder groups. Agency theory and its behavior
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