top managers in europe: education, international
TRANSCRIPT
Top managers in Europe:
Education, international experience, and compensation
Inaugural dissertation
submitted to attain the academic degree
doctor rerum politicarum
(Doktor der Wirtschaftswissenschaften)
at the
ESCP Europe Business School Berlin
by
M.Sc., Frederic Altfeld
born on 24 February 1987 in Bochum
Berlin
2017
Doctoral examination committee
Head: Prof. Dr. Ulrich Pape
Examiner: Prof. Dr. Stefan Schmid
Examiner: JProf. Dr. Tobias Dauth
Day of disputation: September 7, 2017
I
Table of contents
List of abbreviations ................................................................................................................ II
1. Introduction........................................................................................................................ 1
2. The study of top managers ................................................................................................ 4
2.1. The relevance of top managers ................................................................................ 4
2.2. Top managers’ characteristics .................................................................................. 8
2.3. Top managers’ compensation ................................................................................ 12
3. Description of research manuscripts ............................................................................. 14
3.1. Overview of research manuscripts ......................................................................... 14
3.2. Fundamental aims and assumptions ....................................................................... 18
3.3. Theoretical perspectives ......................................................................................... 21
3.4. Data collection and data basis ................................................................................ 24
4. Research manuscripts ..................................................................................................... 26
4.1. Research manuscript 1 ........................................................................................... 26
4.2. Research manuscript 2 ........................................................................................... 27
4.3. Research manuscript 3 ........................................................................................... 28
5. Conclusion ........................................................................................................................ 29
5.1. Contributions .......................................................................................................... 29
5.1.1. Contributions of manuscript 1............................................................. 29
5.1.2. Contributions of manuscript 2............................................................. 31
5.1.3. Contributions of manuscript 3............................................................. 35
5.2. Limitations and future research ............................................................................. 37
6. References ......................................................................................................................... 44
II
List of abbreviations
CEO Chief executive officer
CFO Chief financial officer
ed. Editor
eds. Editors
et al. Et alii
e.g. Exempli gratia (for example)
EUR Euro (currency)
GBP Great Britain Pound (currency)
i.e. Id est (that is)
MNC Multinational company
p. Page
US United States
USD United States Dollar (currency)
1
1. Introduction
Top managers have considerable influence over the fate of the organizations they lead.
In the last several decades, scholars have produced a large body of research providing
evidence that top managers can substantially affect organizational outcomes (Carpenter
et al., 2004; Finkelstein et al., 2009; Quigley & Graffin, 2017).1 Asserting that top
managers play a pivotal role in shaping organizational strategy and performance,
however, should not be seen as a glorification of corporate elites. Top managers’ actions
and decisions are the result of human limitations and biases, and their influence can be
for good or for ill (Cannella, 2001; Hambrick, 2007). In situations of complex,
uncertain, and ambiguous information that characterize much of managerial work,
decisions are affected by top managers’ individual experiences and psychological
properties (Dauth, 2012; Finkelstein & Hambrick, 1990; Geletkanycz & Hambrick,
1997). It is because such individual characteristics influence organizational outcomes
that top managers are an important part of a complete theory of strategic management
(Finkelstein et al., 2009). As Hambrick (1989, p. 5) put it, “if we want to explain why
organizations do the things they do, or, in turn, why they perform the way they do, we
must examine the people at the top.”
Prior research has shown that top managers’ characteristics are associated with
outcomes not only at the organizational level but also at the individual level (Carpenter
et al., 2004; Finkelstein et al., 2009; Schmid & Wurster, 2016, 2017). One such
outcome at the individual level is the top managers’ compensation. Executive
compensation receives great attention from various audiences, such as corporate actors,
1 Throughout this thesis, the terms “top manager” and “executive” are used interchangeably to refer to
individuals at the apex of a firm (Finkelstein et al., 2009; Hambrick & Mason, 1984).
2
academics, policymakers, and the society at large. The topic is surrounded by
considerable controversy and firms’ reporting season is routinely accompanied by
public outrage over supposedly “excessive” pay, especially in cases where top managers
receive large sums while delivering disappointing company performance (Jensen &
Murphy, 1990; Boyd et al., 2012; Gomez-Mejia et al., 2010). Executive compensation
has far-reaching implications not only at the level of the individual top manager but also
at the level of the firm and the society. For example, at the firm level, a large pay gap
between top executives and lower-level employees might have an adverse impact on
long-term firm performance (Bloom, 1999; Connelly et al., 2016).2 At the societal level,
rising executive compensation has been suspected to be a major force behind widening
income inequality in many societies (McCall & Percheski, 2010; Piketty, 2014; Piketty
& Saez, 2003, 2006). Hence, there is great interest in understanding the determinants of
executive compensation, especially since executive pay levels have been rising
considerably over the past decades (Anonymous, 2008; Carter et al., 2009; Frydman &
Jenter, 2010; Murphy, 2005, 2013). However, even though the topic of executive
compensation has been examined extensively by scholars of various disciplines such as
economics, accounting, finance, and management (Devers et al., 2007; Finkelstein et
al., 2009; Gomez-Mejia et al., 2010; Murphy, 1999, 2013), results are mixed and far
from conclusive.
The three research manuscripts that form the core of this thesis advance research on top
managers in a number of ways, extending knowledge in the area of executive
characteristics and in the area of executive compensation. All three manuscripts are
anchored in the European context and address topics that are relevant yet underexplored
2 Prior research suggests that pay dispersion can encourage employees to pursue short-term rewards at the
expense of long-term goals. Furthermore, pay dispersion can result in reduced motivation and feelings
of inequity, which can lead to uncooperative behaviour and higher levels of turnover that adversely
impact long-term firm performance (Bloom, 1999; Connelly et al., 2013).
3
in extant, mostly US centred top management literature (Boyd et al., 2012; Carter et al.,
2009; Dauth, 2012; Tosi & Greckhamer, 2004). Each manuscript has a distinct research
focus: manuscript 1 advances literature on executive characteristics by examining the
relevance of the doctoral degree for top managers in Germany. Thus, it sheds light on an
executive characteristic prevalent specifically among top managers in German speaking
countries (Davoine & Ravasi, 2013; Franck & Opitz, 2004). Manuscript 2 and
manuscript 3 are both concerned not only with executive characteristics but also with
executive compensation. Focusing on chief financial officers (CFOs), manuscript 2
analyses the relationship between CFOs’ international work experience and their
compensation levels. Manuscript 3 investigates how compensation levels of chief
executive officers (CEOs) are affected by various dimensions of Americanization.
Given that executive compensation levels are significantly higher in the US than they
are in Europe (Cheffins & Thomas, 2004; Conyon & Murphy, 2000; McCall &
Percheski, 2010; Murphy, 1999), Americanization might be a force compelling
European firms to adopt US-style compensation practices, raising CEO pay levels.
In order to develop conceptual logics that provide compelling explanations for the
examined relationships, the manuscripts integrate different theoretical lenses. The
hypotheses that are derived from theory are then tested on large samples of top
managers of German (manuscript 1) or European (manuscripts 2 and 3) companies
using quantitative empirical analysis.
The remainder of this thesis is structured as follows. Section 2 outlines the field of top
management research, explaining the relevance of top managers in general, their
characteristics, and their compensation. Next, section 3 provides an overview of the
research manuscripts; furthermore, the fundamental aims and assumptions, the
4
theoretical perspectives and the data basis used in the manuscripts are described.
Thereafter, section 4 presents the three research manuscripts that are the centrepiece of
this thesis. Finally, section 5 summarizes the contributions of the thesis and discusses
limitations and possible avenues for future research.
2. The study of top managers
2.1. The relevance of top managers
Do top managers matter? On the surface, this question seems almost trivial. Top
managers receive intense media attention that covers, for example, their decisions,
careers, personalities, and opinions. Strategic moves of companies are often depicted as
direct actions of their top managers, and success (or failure) of firms is often attributed
to the people at the top (Bültel, 2011; Graffin et al., 2013). This can even amount to
some top managers, usually CEOs, reaching celebrity status (Hayward et al., 2004;
Wade et al., 2006). Jack Welch at General Electric or Steve Jobs at Apple are examples
of such “celebrity CEOs” who are credited with leading their companies to outstanding
success. Conversely, top managers are routinely blamed for poor firm performance or
other corporate misfortunes, which can lead to top managers quickly losing their jobs
(Huson et al., 2004; Shen & Cho, 2005). However, perceptions of top managers as
pivotal drivers of firm outcomes, including performance, might well overestimate the
effect that upper echelons executives have. There is a strong human tendency,
sometimes described as the “romance of leadership”, to attribute a greater importance to
executives than they actually have (Chen & Meindl, 1991; Finkelstein et al., 2009;
Meindl et al., 1985). Succumbing to the “fundamental attribution error” (Weber et al.,
5
2001), people tend to bestow disproportionate credit and blame to top managers while
neglecting situational influences (Quigley & Hambrick, 2015).
In academic research, various relevant theories ascribe different degrees of relevance to
top managers. Historically, the popularity of these theories has varied, and with it the
interest in top managers (Finkelstein et al., 2009). In the very early phases of strategy
research, top managers were depicted as playing a crucial role in shaping firm strategy
(Chandler, 1962; Learned et al., 1961; Selznick, 1957). However, major organizational
theories that dominated scholarly research thereafter gave little attention to top
managers, assuming that they have little effect on organizational outcomes (Finkelstein
et al., 2009). According to these theories, outside forces dictate the course of an
organization, with little or no room for choices to be made by top managers. One
prominent theory in this regard is the population-ecology view (Dosi & Nelson, 1994;
Hannan & Freeman, 1977; Nelson & Winter, 1982), which focuses on the effects of
environment on organizational structure. The unit of analysis are populations of
organizations and variations in organizational form are viewed as largely accidental.
Individuals at the helm of organizations are assumed to have only little latitude of action
because organizations are constrained by internal and external inertial pressures. Hence,
scholars of the population-ecology view had “pretty much taken leadership and choice
out of the picture” (Cannella, 2001, p. 37).
In another influential theory of organization, the neo-institutional view (DiMaggio &
Powell, 1983; Meyer & Rowan, 1977; Scott, 2014; Zucker, 1987), top managers again
play only a marginal role. According to this perspective, organizations are embedded in
institutional environments and face pressures to conform to demands of these
environments. It follows that in the neo-institutional view, organizations were
6
fundamentally constrained by external demands for conformity, and therefore little
room was left for decision making by top managers. Similarly, in the economics-based
view that dominated strategic management research in the late 1970s and early 1980s
(Finkelstein et al., 2009), top managers were barely acknowledged. The focus was
instead on techno-economic factors such as industry analysis, portfolio matrices, and
competitive dynamics (Porter, 1980; Hambrick, 1989; Schendel & Hofer, 1979). Little
attention was paid to top managers because they were presumed to be rational decision
makers, capable of processing all the relevant economic information to arrive at the
optimal strategic decision (Hambrick, 1989).
A shift back toward a focus on top managers as an integral part of theories explaining
organizational outcomes began in the early 1970s (Finkelstein et al., 2009), starting with
the “strategic choice perspective” put forward by Child (1972). This perspective was
intended as a corrective to the dominating view which saw organizational characteristics
determined by environmental conditions but which “fails to give due attention to the
agency of choice by whoever have the power to direct the organization” (Child, 1972, p.
2). Strategic choice, understood as the process by which an organization’s dominant
coalition decides upon courses of strategic action, was suggested as a necessary element
in any theory of organizational functioning (Child, 1997). Then, in 1984, came the
seminal publication of Hambrick and Mason’s upper echelons perspective (Hambrick &
Mason, 1984), which acted as a catalyst for academic interest in top managers
(Carpenter et al., 2004; Finkelstein et al., 2009). The upper echelons perspective
suggests that “the organization becomes a reflection of its top managers” (Cannella,
2001, p. 38). More specifically, the premise is that top managers’ actions are based on
their personalized interpretation of a given strategic situation, and this interpretation is a
function of the top managers’ experiences, values, and personalities. Furthermore, the
7
upper echelons perspective proposes that top managers’ demographic characteristics can
be used as proxies for underlying (and more difficult to measure) constructs such as
cognitions, values, and perceptions (Hambrick, 2007; Hambrick & Mason, 1984).3 A
host of academic studies based on, or influenced by, the upper echelons perspective has
been published in the decades following Hambrick and Mason’s 1984 article, and until
today there is no sign of abating research interest (Finkelstein et al., 2009). Hence, the
field of organization and strategy research has redirected its attention to executives and
their role in shaping organizational outcomes.
In order to empirically investigate if and how much top managers, particularly CEOs,
matter for organizational outcomes, a number of studies have aimed to quantify the so-
called “CEO effect”, i.e. the degree to which CEOs can influence company performance
(Fitza, 2014). With a study by Lieberson and O’Connor in 1972 emerged a scholarly
debate about the magnitude of this effect that is still going on today (for a recent review,
see Hambrick & Quigley, 2014). Studies in this line of research usually employ
variance partitioning methodology to isolate the amount of variance that can be
attributed to the CEO as opposed to other factors (Ahn et al., 2009; Fitza, 2014;
Hambrick & Quigley, 2014; Lieberson & O’Connor, 1972; Mackey, 2008; Quigley &
Hambrick, 2015; Quigley & Graffin, 2017; Thomas, 1988). While results of individual
studies, as in all empirical research, vary, Quigley and Graffin (2017) suggest that there
is a “consensus” deriving from the plurality of prior work estimating the CEO effect at
around 15 percent. Recently, this consensus has been called into question by Fitza
(2014, 2017), who claims that methodological flaws in prior studies employing variance
decomposition methodology have resulted in inflated CEO effects. Fitza proposes that
once effects of random chance are accounted for, the CEO effect is not larger than 5.0
3 For further explanations of the upper echelons perspective, see section 2.2.
8
percent (Fitza, 2014) or even indistinguishable from the effect of chance (Fitza, 2017).
However, Quigley & Graffin (2017) have in turn challenged Fitza’s methodology and
conclusions, “reaffirming that the CEO effect is significant and much larger than
chance” (Quigley & Graffin, 2017, p. 793). Furthermore, Quigley and Hambrick (2015)
document that the CEO effect has grown in recent decades. This finding suggests that
increased attention to top managers, for instance by the media and general public, might
to some degree be explained and justified by an increase in the actual significance of top
managers. Another study, relying on event study methodology instead of variance
partitioning methodology, also arrives at the conclusion that CEOs have become
increasingly influential. Analysing shareholders’ reactions to unexpected CEO deaths,
the authors find that market reactions to such events have increased significantly over
the past decades (Quigley et al., 2017).
Summarizing the above, it becomes clear that both theoretical reasoning and empirical
evidence exist for the notion that top managers can affect organizational outcomes. Still,
it has to be acknowledged that the extent of top managers’ influence can vary
significantly. Top managers’ latitude of action, or managerial discretion, emanates from
environmental, organizational, and individual managerial factors (Crossland &
Hambrick, 2007; Finkelstein et al., 2009; Hambrick & Abrahamson, 1995; Hambrick &
Finkelstein, 1987). Therefore, depending on these factors, top managers are in a
position to have a greater or lesser impact on organizational outcomes. Overall,
however, prior theoretical and empirical literature suggests that top managers matter.
2.2. Top managers’ characteristics
Even if top managers matter, i.e. have significant influence on organizational outcomes,
it could be argued that individual top managers would hardly differ in the way they steer
9
a company. After all, in most cases top managers are highly educated and go through a
long and competitive selection process as they rise through the ranks (Busenbark et al.,
2015; Connelly et al., 2014; Conyon et al., 2001; Tian et al., 2011). As a result, the
variance in skills of those individuals reaching the top might be relatively low and each
would seem capable of analysing a strategic situation and decide on the appropriate
course of action (Fitza, 2014; Hambrick et al., 2005). However, research on the nature
of executive work shows that top managers generally are confronted with more stimuli
than they can adequately process, face myriads of decisions to make, and are constantly
under immense time pressure (Kotter, 1982; Matthaei, 2009; Mintzberg, 1971, 1973).
As a result, they are limited in the comprehensiveness of their analyses and search for
solutions (Hambrick et al., 2005). This view is consistent with upper echelons theory,
which suggests that the situations top managers face are usually characterized by
complexity, uncertainty, and ambiguity (Dauth, 2012; Hambrick, 2007; Hambrick &
Mason, 1984; Schwenk, 1988; Starbuck & Milliken, 1988). Upper echelons theory
draws on theorists of the Carnegie School (Cyert & March, 1963; March & Simon,
1958) and builds on the premise of bounded rationality to argue that in situations of
complex and uncertain information, human limitations and biases restrict an executive’s
ability for rational decision making. Complex decisions are the result of behavioural
factors rather than of perfectly rational optimization based on complete information
(Finkelstein & Hambrick, 1990; Geletkanycz & Hambrick, 1997). Hence, it is suggested
that “executives make choices through highly individualized lenses that are formed by
the managers’ experiences, personalities, and values” (Chin et al., 2013, p. 200).
The process through which top managers’ characteristics, i.e. executive experiences and
psychological properties (such as personality and values), shape top managers’ decision
making is described in a model that is at the core of upper echelons theory (Carpenter et
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al., 2004; Dauth, 2012; Finkelstein et al., 2009; Hambrick, 2007; Hambrick & Mason,
1984). This model presumes a strategic situation which is complex and made up of a
plethora of stimuli from within and outside the organization. Top managers facing this
situation and trying to arrive at a decision cannot process all these stimuli, given their
bounded rationality. Instead, top managers’ strategic decisions are made on the basis of
their individual perception of the situation, or, in other words, their own “construed
reality” (Chatterjee & Hambrick, 2011; Nielsen & Nielsen, 2011; Sutton, 1987). The
centrepiece in converting the (objective) strategic situation into an individual perception
is a top manager’s “executive orientation”, encompassing experiences and
psychological factors, which create a “screen” between the situation and the eventual
perception (Hambrick & Mason, 1984). More specifically, top managers’ experiences
and psychological factors serve to filter and distort available stimuli in a three-step-
process by affecting: first, their field of vision, i.e. on which events, trends, news, and
conditions inside and outside the organization top managers focus their (limited)
attention; second, their selective perception, i.e. which stimuli from within their field of
vision are actually perceived and processed; and third, their interpretation, i.e. how they
attach meaning to those stimuli (Finkelstein et al., 2007; Hambrick, 2007; Starbuck &
Milliken, 1988). It follows that top managers’ perception of a given strategic situation,
and the strategic choices eventually made based on this perception, are highly
individualized. As Hambrick (1989, p. 5) notes, “no two strategists will identify the
same array of options for the firm; they will rarely prefer the same options; if, by remote
chance, they were to pick the same options, they almost certainly would not implement
them identically.”
A top manager’s “executive orientation” comprises two categories of characteristics:
psychological properties and observable experiences (Finkelstein et al., 2009;
11
Hambrick, 2005). Psychological properties, such as values, cognitions, and other
elements of personality, offer great potential for explaining top managers’ decisions and
behaviours. However, the use of psychological properties in large sample research on
top managers is severely hindered by methodological obstacles. First, psychological
properties are generally difficult to measure (Pfeffer, 1983), and second, top managers
are usually quite reluctant to participate in time-consuming psychological testing
(Hambrick & Mason, 1984). Therefore, upper echelons scholars encourage researchers
to rely on the second category of top managers’ characteristics, i.e. observable
experiences, and examine their associations with outcomes at the organizational or
individual level. Observable experiences, which are frequently called demographic
characteristics in upper echelons literature, are used as proxies for underlying, more
elusive and unobservable psychological properties.4 To date, researchers have examined
various types of executives’ demographic characteristics. Large parts of research have
focused on four major categories: executive tenure, functional background (such as
finance, marketing, etc.), education, and, more recently, international experience (for
reviews, see Carpenter et al., 2004; Finkelstein et al., 2009). Lately, the scope has been
broadened with studies investigating a vast array of different kinds of executives’
characteristics, for example gender (Lee & James, 2007; Perryman et al., 2016; Post &
Byron, 2015), political ideology (Briscoe et al., 2014; Chin et al., 2013; Gupta &
Wowak, 2016), fatherhood (Dahl et al., 2012), or social class origins (Kish-Gephart &
Campbell, 2015; Martin et al., 2016).
4 For limitations of this approach, see section 5.2.
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2.3. Top managers’ compensation
The topic of top management compensation receives great attention and scrutiny not
only from academics but also from practitioners, politicians, and the media. The debate
regarding whether top managers are over- or underpaid has been ongoing for many
years and took place against the backdrop of an immense rise in top managers’
compensation levels, for example in the US and Europe. In the US, for which
availability of historical executive compensation data is much better as compared to
other countries (Fernandes et al., 2013; Murphy, 2013), executive pay was rather stable
in the period from the 1940s to the 1970s. By contrast, in the following decades a
remarkable surge in pay levels has taken place (Frydman & Jenter, 2010; Frydman &
Saks, 2010; Murphy, 2013; Van Veen & Wittek, 2016). This is illustrated in the rise of
the median total compensation of S&P 500 CEOs, which was at 3.0 million USD in
1992. Until 2012, this number has more than tripled, reaching 9.1 million USD
(Anonymous, 2014; Murphy, 2013). While the steep increase in executive pay might be
most pronounced in the US, similar patterns can be observed in other countries
(Anonymous, 2008; Carter et al., 2010; Conyon et al., 2011; Conyon & Schwalbach,
2000; Murphy, 2005; Van Veen & Wittek, 2016). Critics complain that as executive pay
went up, the gap between compensation of top managers and that of lower-level
employees has widened markedly. While in large US firms the ratio of CEO pay to that
of rank-and-file employees was at around 40-1 in the 1980s, this ratio grew to
somewhere between 140-1 and 335-1 nowadays, depending on the sample and
estimation technique used (Anonymous, 2016; Kiatpongsan & Norton, 2014; McCall,
2004; Shin, 2014). Not only the level but also the structure of executive compensation
has changed over the years. In the 1930s and 1940s, executive pay comprised mainly of
fixed salaries and short-term cash bonuses. In the decades that followed, long-term
13
compensation – particularly in the form of restricted stock awards and stock options –
grew more and more prevalent, accounting for an increasingly large share of total
compensation (Anonymous, 2014; Frydman & Saks, 2010; Murphy, 2013).
The relevance of executive compensation is reflected in the immense growth of
academic literature on this topic (for reviews see Devers et al., 2007; Finkelstein et al.,
2009; Gomez-Mejia et al., 2010; Murphy, 1999, 2013). Studies span a large variety of
theories and research questions, investigating, in broad terms, either the determinants or
the consequences of executive compensation. For decades, large parts of the literature
on the determinants of executive compensation were based on an economic logic and
have focused on the influence of firm size and firm performance on executive pay.
While firm size has frequently been found to be a robust predictor of executive pay
levels, the relationship between pay and performance is only weakly supported at best
(Finkelstein et al., 2009; Jensen & Murphy, 1990; Tosi et al., 2000). In response,
researchers have broadened the focus of executive compensation research, examining a
host of factors at the country, industry, firm, and individual level (Devers et al., 2010;
Gomez-Mejia et al., 2010). However, after decades of research on determinants of
executive compensation that produced a voluminous body of empirical literature, results
are often disparate. Even on fundamental issues such as the pay-performance-link,
results are mixed and scholarly conclusions range from “top executives are worth every
nickel they get” (Murphy, 1986, p. 125) to “there is no rational basis for the
compensation paid to top management” (Kerr & Bettis, 1986, p. 661). What researchers
can surely agree on is the assertion found in a recent literature review on the topic,
stating that “[e]xecutive compensation is a complex and contentious subject” (Frydman
& Jenter, 2010, p. 76). It becomes clear that further research is required to achieve a
more complete understanding of executive compensation. In this regard, recent calls in
14
the literature emphasize the importance to develop explanations of executive
compensation that go beyond economic factors to encompass social and political
perspectives (Cuevas-Rodríguez et al., 2012; Finkelstein et al, 2009; Murphy, 2013).
Furthermore, given the focus on US firms prevailing in large parts of executive
compensation literature (Boyd et al., 2012; Carter et al., 2009; Tosi & Greckhamer,
2004), knowledge about what determines executive compensation levels in Europe is
even less developed. Because prior research mostly deals with executives of US firms,
extant theories and empirical insights about executive compensation are
overwhelmingly derived from the US context. One reason for this narrow focus of
research attention might be that the US had in place requirements for disclosure of
detailed and individualized executive compensation data since the 1930s (which have
been significantly expanded over the years). In contrast, most other countries
historically required disclosure only of aggregate cash compensation for the top
management team, with little information on equity-linked pay components (Fernandes
et al., 2013; Murphy, 2013). The manuscripts of this thesis addressing CFO or CEO pay
take advantage of recently expanded disclosure rules on executive compensation in
many European countries, which allow the calculation of total pay levels of individual
executives.
3. Description of research manuscripts
3.1. Overview of research manuscripts
Three research manuscripts constitute the centrepiece of this thesis. While all three
manuscripts are grounded in top management research, each individual manuscript
focuses on specific research questions that address different gaps in the literature. In the
15
following paragraphs the research context, research questions, and methodological
approach of each manuscript are presented.
Manuscript 1 (“Der Doktortitel von Top-Managern der DAX-30-Unternehmen”)
analyses the role of the doctorate of top managers in large German firms. Comparative
international studies show that a strikingly high percentage of top managers in Germany
(and, similarly, Austria and Switzerland) hold a doctoral degree. For example, a recent
study by Davoine and Ravasi (2013) shows that in Germany nearly every second top
manager of a large firm has such a degree (45%), compared to only 6-7% in France and
in the UK. The high rate of doctoral degree holders among top managers in Germany is
a long-standing phenomenon, with studies routinely documenting rates of around 50%
since the 1970s (Booz-Allen & Hamilton, 1973; Buß, 2007; Hartmann; 2006; Oechsler
et al., 2008; Opitz, 2008; Poensgen, 1982). However, recent media reports suggest that
the importance of the doctorate for top managers might be in decline, for example
because other credentials and experiences are becoming increasingly relevant for
(aspiring) top managers (Engeser, 2011; Franck et al., 2004; Löhr, 2014; Opitz; 2005b;
Schmid & Wurster, 2017). Against this background, the manuscript sets out to examine
the relevance that the doctorate has for executives in Germany nowadays. To that end,
in a first step an empirical analysis of the current prevalence of the doctorate among
management board members (members of the “Vorstand”) and supervisory board
members (members of the “Aufsichtsrat”) of firms listed in the DAX-30 is presented. In
a second step, event study methodology (Binder, 1998; Gerpott, 2009; Schmid & Dauth,
2014) is employed to gauge investors’ reaction to the appointment of top managers
holding a doctoral degree. Manuscript 1 connects to and advances extant top
management literature on executive educational experiences and credentials (see section
2.2).
16
Manuscript 2 (“International work experience as a determinant of CFOs’ compensation
levels: Evidence from Europe”) examines the relationship between CFOs’ international
work experience and their compensation. In practitioner literature it is frequently stated
that in multinational companies (MNCs), CFOs with international work experience are
better equipped to deal with the challenges stemming from internationalization
(Ernst&Young, 2013; FinancialExecutive, 2012; Groysberg et al., 2011; Johnson, 2015;
Michael Page International, 2012). Consequently, CFOs’ international work experience
should be reflected in increased compensation. However, so far there is little empirical
evidence for the popular claim that international work experience pays off for CFOs.
The manuscript aims to establish the relationship between CFOs’ international work
experience and their compensation, based on a sample of CFOs of the largest firms in
Europe. More specifically, it is argued that international work experience has not only
beneficial but also detrimental effects: while a CFO develops valuable knowledge,
skills, and abilities during the time working abroad, his or her social network ties in the
organization’s home country are weakened. Furthermore, the manuscript investigates
whether the relationship between CFOs’ international work experience and their
compensation is contingent on the CEOs’ level of international work experience.
Overall, the manuscript extends previous literature on executives’ international
experience (see section 2.2) and executive compensation (see section 2.3).
Manuscript 3 (“Americanization and CEO pay in Europe: The moderating role of CEO
power”) analyses the relationship between Americanization and CEO compensation in
Europe. Furthermore, it explores how this relationship is moderated by CEO power.
While CEO pay has been rising considerably in many parts of the world (see section
2.3), there remain large differences between countries. In particular, the US stands out
as the country where CEOs receive much higher compensation than CEOs in other
17
countries (Cheffins & Thomas, 2004; Gerakos et al., 2013; McCall & Percheski, 2010;
Murphy, 1999). This gap in CEO pay is illustrated in a study by Conyon and Murphy
(2000) who show that in 1997, the CEOs of the 500 largest companies in the United
Kingdom in aggregate received 330 million GBP (660,000 GBP each), whereas the
CEOs of the top 500 US companies in aggregate made 3.2 billion GBP (6.3 million
GBP each).5 Besides the overall high level of pay, a second distinguishing feature of
US-style CEO compensation concerns the structure of the compensation packages. For
US CEOs, salary, i.e. the fixed component in compensation packages, makes up only a
relatively small proportion of total compensation; instead, variable components play a
much more important role (Murphy, 1999; Cheffins, 2003). It has been stated both in
academic and in practitioner literature that “American-style pay moves abroad”
(Johnston, 1998), i.e. that CEO compensation practices common in the US might be
adopted by firms in other parts of the world, for example in Europe (Cheffins, 2003;
Fiss & Zajac, 2004; Zattoni & Minichilli, 2009). As an article in the New York Times
put it: “Along with hip-hop and Hollywood movies, Europeans are eagerly importing
another American phenomenon: soaring pay packages for chief executives” (Fabrikant,
2006). However, firms differ in their readiness to adopt US compensation practices
(Bruce et al., 2005; Chizema, 2010; Sanders & Tuschke, 2007). Prior literature suggests
that Americanization, i.e. exposure to the US institutional environment, might be an
important factor driving the adoption of US-style CEO pay (Chizema, 2010; Fernandes
et al., 2013; Oxelheim & Randøy, 2005; Sanders & Tuschke, 2007). Hence, using a
sample of CEOs of the largest firms in Europe, the manuscript sets out to explore the
association between various dimensions of Americanization and the level of CEO
5 The differences in CEO pay levels between the top 500 companies in the US and in the United Kingdom
can in part be explained by factors such as company size and industry, which systematically differ
between the two countries (Conyon & Murphy, 2000; Fernandes et al., 2013).
18
compensation. More specifically, Americanization of the CEO, of the firm and of the
industry are examined. In addition, it is investigated whether CEO power plays a
moderating role in the Americanization – CEO compensation relationship. The
manuscript is grounded in executive compensation literature (see section 2.3), shedding
more light on the drivers of CEO compensation levels in Europe. Moreover, the
manuscript furthers knowledge on executive characteristics (see section 2.2) by
explaining effects of Americanization of the CEO and CEO power on compensation
levels.
3.2. Fundamental aims and assumptions
Research in social science can be conceptualized as following five fundamental aims in
order to create novel insights: understanding, description, explanation, prediction, and
design (Brühl, 2015; Kornmeier, 2007).6 The research manuscripts comprised in this
thesis primarily aim at explanation, i.e. identifying cause and effect relationships.
However, it is important to note that “no social science research can prove causality”
(Carpenter et al., 2001, p. 499). In this regard, cause and effect relationships uncovered
in the research manuscripts should be seen as regularities between the elements of the
study, not as universal laws which are common in the natural sciences (Brühl, 2015;
Kirsch et al., 2007; Schmid & Oesterle, 2009). In manuscript 1, the examined
relationship is between the doctorate of a newly appointed top manager and the stock
market reaction at the time of the appointment. Manuscript 2 aims at explaining the
association between CFOs’ international work experience and the level of compensation
they receive. A deeper understanding is developed by exploring how this association is
affected by the CEOs’ international work experience. Finally, manuscript 3 focuses on
6 Besides these “cognitive aims”, researchers are likely to be also guided by personal aims, for example
striving for prestige, power, or income (Brühl, 2015).
19
the potential effect of various dimensions of Americanization on CEO pay, and on the
role of CEO power which might magnify this effect. In all manuscripts, hypotheses
about the proposed relationships are formulated based on arguments derived from
appropriate theoretical perspectives (see section 3.3). Besides explanation, manuscript 1
also follows the aim of description, presenting a detailed picture of the rate of doctoral
degree holders among the top managers of the DAX-30 companies.
In order to outline the fundamental assumptions underlying this thesis, the research
approach taken in the manuscripts will be located in the four paradigms developed by
Burrell and Morgan (1979). These paradigms are defined by two dimensions: the
subjective-objective dimension and the regulation-radical change dimension. Taken
together, the two dimensions yield a 2×2 matrix comprising four research paradigms
(see Figure 1).
The subjective-objective dimension is concerned with assumptions about the nature of
science. More specifically, there are four sets of assumptions concerning ontology,
epistemology, human nature, and methodology. Two extreme positions can be
identified. First, the objectivist approach, which is characterized by: a realist position on
ontology (assumption: “reality” is of an objective nature), a positivist approach to
epistemology (assumption: knowledge is something that can be acquired), a determinist
view on human nature (assumption: individuals’ activities are determined by the
environment), and a nomothetic approach to methodology (use of quantitative data
analysis). Second, the subjectivist approach, which is based upon a nominalist position
on ontology (assumption: “reality” is the product of individual cognition), an anti-
positivist stance on epistemology (assumption: knowledge is something that has to be
experienced), a voluntarist view on human nature (assumption: individuals are
20
autonomous in their activities), and an ideographic approach to methodology (use of in-
depth qualitative analysis) (Burrell & Morgan, 1979; Deetz, 1996; Gioia & Pitre, 1990).
The regulation-radical change dimension focuses on assumptions about the nature of
society. The two contrasting extreme points concerning this dimension are: first, the
sociology of regulation, which is concerned with the status quo, unity, and cohesiveness
of society; second, the sociology of radical change, which is interested in aspects of
radical change and conflict (Burrell & Morgan, 1979).
Regarding the subjective-objective dimension, the three research manuscripts follow an
objectivist approach. This is most clearly reflected in the choice of nomothetic
methodology, as all three manuscripts employ quantitative techniques of data analysis,
examining relationships and regularities between the elements of interest. Concerning
the regulation-radical change dimension, the three manuscripts can be seen as rooted in
the sociology of regulation, given that the manuscripts are concerned with explanations
of the status quo, without emphasizing aspects of radical change. Considering the two
dimensions together, the research approach taken in the manuscripts can be located in
the functionalist paradigm (Burrell & Morgan, 1979). Thus, the research presented in
this thesis follows the predominant paradigm in organizational research and
international management research (Acedo & Casillas, 2005; Gioia & Pitre, 1990;
Kutschker & Schmid, 2011; Schmid & Oesterle, 2009).
21
Figure 1: Burrell and Morgan’s (1979) four paradigms
Source: Burrell & Morgan, 1979, p. 22.
3.3. Theoretical perspectives
The three research manuscripts of this thesis are based on the fundamental tenets of the
upper echelons perspective. The manuscripts share the underlying assumption that top
managers (and, more specifically, their experiences and psychological properties) have
an impact on strategic choices and, ultimately, organizational performance.
Furthermore, the manuscripts are based on the understanding that top managers’
demographic characteristics function as valid proxies for underlying and more elusive
constructs such as cognitions and values (Finkelstein et al., 2009; Hambrick, 2007;
Hambrick & Mason, 1984).
While grounded in the upper echelons perspective, each manuscript employs additional
theoretical perspectives in order to develop appropriate conceptual logics that explain
the investigated relationships. Manuscript 1 draws on human capital theory (Becker,
1975; Mackey et al., 2014) and on signalling theory (Spence, 1973, 2002) to provide
Radical
humanist
Interpretive Functionalist
Radical
structuralist
The sociology of radical change
The sociology of regulation
Subjective Objective
22
explanations for why the doctorate is relevant for top managers. From a human capital
perspective, the doctorate matters for the knowledge, skills, abilities, and other
characteristics that a top manager has developed during the time of his or her doctoral
studies (Falk & Küpper, 2013; Heineck & Matthes, 2012; Oechsler et al., 2008). Thus,
the top manager’s human capital is enhanced which could improve his or her job
performance. However, signalling theory provides another explanation for the relevance
of the doctorate for top managers. According to this perspective, the doctorate can be
interpreted as a signal for general ability. Because the level of ability of an individual is
not readily observable, employers rely on certain indicators that signal such ability.
Educational credentials can be such indicators, as higher education can be considered as
a filter system that sorts individuals depending on their abilities (Arrow, 1973; Franck
& Opitz, 2007; Hyclak et al., 2013). It is particularly in Germany that the doctorate
might function as an important educational credential that signals a high level of ability.
The German higher education landscape is characterised by a rather egalitarian structure
compared to many other countries which have a clearly defined segment of elite
institutions (Hartmann, 2001, 2009). Therefore, ambitious students might pursue a
doctorate to signal high levels of ability (Franck & Opitz, 2007; Opitz, 2005a; Oechsler
et al., 2008). In the manuscript, both human capital and signalling theory are employed,
because both the knowledge and skills acquired during doctoral studies as well as the
doctorate’s signal for general ability might be relevant in the context of the study.
Manuscript 2 also uses human capital theory, as it provides a compelling logic to
explain the benefits that an individual gains from international work experience. CFOs
who have worked abroad are likely to have developed knowledge and skills, such as a
thorough understanding of foreign customer needs, business practices, and legal
systems (Ramaswami et al., 2016; Sambharya, 1996; Schmid et al., 2015). Since such
23
knowledge and skills allow CFOs to better deal with the international challenges arising
in MNCs, CFOs’ international work experience might be valued by the firm, which in
turn should be reflected in higher compensation (Carpenter et al., 2001; Peng et al.,
2015; Schmid & Wurster, 2016). However, experiences not only shape an executive’s
knowledge and skills but also his or her social networks, which can also have an
influence on job performance and compensation (Engelberg et al., 2013; Geletkanycz &
Hambrick, 1997; Geletkanycz et al., 2001; Haynes & Hillman, 2010). Thus, the
manuscript integrates social capital theory (Adler & Kwon, 2002; Kwon & Adler, 2014)
to account for the effects of international work experience on CFOs’ social networks.
Combining human capital and social capital perspectives, both the upside and the
downside of international work experience for executives are incorporated into the
conceptual model.
Manuscript 3 primarily draws on neo-institutional theory to develop an understanding of
how Americanization affects CEO pay in Europe. This theoretical perspective focuses
on an organization’s embeddedness into its institutional environment (DiMaggio &
Powell, 1983, 1991; Meyer & Rowan, 1977; Scott, 2014; Zucker, 1987). Organizational
success and survival are presumed to depend on conformity with the demands of the
institutional environment. More specifically, organizations are confronted with
assumptions and values of what constitutes appropriate organizational behaviour and
practices (Meyer & Rowan, 1977; Thornton, 2004). The adoption of organizational
practices is conceptualized as a result of coercive, normative, and mimetic isomorphic
pressures that organizations are subject to (Chizema, 2010; DiMaggio & Powell, 1983,
1991; Judge et al., 2010). Because MNCs, by their very nature, span national
boundaries, they are embedded in and exposed to various institutional environments
(Kostova et al., 2008; Marano & Kostova, 2016; Saka-Helmhout et al., 2016). Hence,
24
MNCs might be pressured to incorporate organizational practices from institutional
environments other than their home environment (Kostova & Zaheer, 1999; Marano &
Kostova, 2016; Sanders & Tuschke, 2007). In the context of manuscript 3, this means
that various dimensions of Americanization, understood as exposure to the US
institutional environment, might compel European firms to adopt US-style CEO
compensation practices. It should be noted that in large parts of previous research based
on neo-institutional theory, the role of top managers has been relegated or not addressed
(Kraatz & Moore, 2002; Sanders & Tuschke, 2007). However, recent theoretical and
empirical neo-institutional works have emphasized the crucial role of executives in
organizational change and practice adoption processes (Geng et al., 2016; Greenwood &
Hinings, 1996; Sanders & Tuschke, 2007; Scott, 2014; Young et al., 2008). Following
this rationale and considering prior literature highlighting the importance of power
relations among corporate governance actors in the adoption of practices (Aguilera &
Jackson, 2010; Chizema, 2010; Greenwood & Hinings, 1996; Krenn, 2016; Westphal &
Zajac, 1994), the neo-institutional perspective is combined with managerial power
theory. At its core, managerial power theory suggests that CEOs who have power vis-à-
vis the board can influence the amount and composition of their own compensation
(Abernethy et al., 2015; Bebchuk & Fried, 2004; Bebchuk et al., 2002; Morse et al.,
2011; Van Essen et al., 2015). On this basis, we suggest that powerful CEOs can
leverage the exposure to a foreign institutional environment to increase their
compensation.
3.4. Data collection and data basis
In manuscript 1, the initial sample consisted of all members of the management boards
and supervisory boards of the DAX-30 firms. The initial samples of manuscript 2 and
25
manuscript 3 are both based on the 500 largest firms in terms of market capitalization in
Europe, with manuscript 2 analysing the CFOs and manuscript 3 examining the CEOs
of these firms.7 Firm- and industry-level data (for example: sales, firm performance,
ownership, leverage, etc.) were collected from firms’ annual reports and the two
databases Standard&Poor’s Capital IQ and Thomson Reuters Datastream. Individual-
level data comprised a range of information on the education and the career path of top
managers (for instance: nationality, number of years and location of international
education and work experience, tenure in current position, MBA title, doctorate, etc.).
Such data were hand-collected from top managers’ CVs or similar biographic
documents, using a variety of sources in order to achieve the best possible data
completion rate. In order to ensure validity of the data, a hierarchical data collection
procedure was applied (Georgakakis et al., 2016; Greve et al., 2009): first, data were
collected from annual reports and company websites. Second, for data that could not be
collected in the first step, biographical databases (e.g. BoardEx, Who’s who,
Standard&Poor’s Capital IQ) were used. Third, in cases where there was still
information missing, investor relations departments or top managers/top managers’
offices were contacted directly. Thus, the hierarchical data collection procedure ensured
that individual-level data primarily came from annual reports and company websites,
which can be considered reliable sources provided by the firm itself (Greve et al., 2015;
Van Veen & Marsman, 2008). By using information on top managers’ demographic
characteristics drawn from secondary sources, we follow the common and
recommended approach in upper echelons research (Finkelstein et al., 2009; Hermann
& Datta, 2005; Nielsen, 2010).
7 The 500 largest firms by market capitalization in Europe were identified from the Financial Times 500
Europe list, a ranking published annually by the Financial Times (Financial Times, 2016).
26
4. Research manuscripts
4.1. Research manuscript 1
Title: Der Doktortitel von Top-Managern der DAX-30-Unternehmen
Authors: Stefan Schmid, Frederic Altfeld, Tobias Dauth
Status: Revise and resubmit (Zeitschrift für betriebswirtschaftliche
Forschung)
Journal ranking: B (VHB-JOURQUAL 3)
Manuscript available from the author upon request.
27
4.2. Research manuscript 2
Title: International work experience as a determinant of CFOs’
compensation levels: Evidence from Europe
Authors: Stefan Schmid, Frederic Altfeld
Status: Revise and resubmit (European Management Journal)
Journal ranking: B (VHB-JOURQUAL 3)
Manuscript available from the author upon request.
28
4.3. Research manuscript 3
Title: Americanization and CEO pay in Europe: The moderating role of
CEO power
Authors: Stefan Schmid, Frederic Altfeld, Tobias Dauth
Status: Conditionally accepted (Journal of World Business)
Journal ranking: B (VHB-JOURQUAL 3)
Manuscript available from the author upon request.
29
5. Conclusion
5.1. Contributions
This thesis makes several contributions to top management research, more specifically
to research on executive characteristics and executive compensation. In the following
sections, the contributions of the individual manuscripts are elaborated.8
5.1.1. Contributions of manuscript 1
Manuscript 1 provides novel insights about an executive characteristic prevalent among
top managers in German speaking countries: the doctorate. Prior studies investigating
the implications of having top managers with particular educational backgrounds
usually focused on executives of US firms (e.g. Bertrand & Schoar, 2003; Datta &
Iskandar-Datta, 2014; Gomulya & Boeker, 2014; Hambrick et al., 1992; Nguyen et al.,
2015). Naturally, these studies were interested in educational characteristics relevant for
top managers in the US context, such as MBA degrees or elite education from Ivy
League universities. Manuscript 1 sheds light on the doctorate as an educational
characteristic which is relevant specifically for top managers in German speaking
countries and which, therefore, has received relatively little attention in prior top
management research. Based on an examination of the DAX-30 firms, the study finds
that 45% of the top managers have a doctorate, with the rate being higher for members
of the supervisory board (47%) than for members of the management board (42%).
Interestingly, in both boards the chairmen are more likely to hold a doctoral degree than
the other board members: in the management boards, 58% of the
CEOs/“Vorstandsvorsitzende” have a doctorate, compared to 39% of regular members.
8 More detailed elaborations on the contributions can be found in the respective research manuscripts.
30
In the supervisory boards, chairmen/“Aufsichtsratsvorsitzende” show a 62% rate of
doctoral degree holders, whereas for other members of this board the rate is at 45%.
Furthermore, it is found that the share of top managers with doctoral degree varies
greatly by industry, from 24% in the financial services industry to 58% in the
pharmaceutical industry. Finally, the study also shows that the rate of doctoral degree
holders is higher among older top managers than among younger top managers. This
stands in contrast to the MBA title, which is found more frequently among younger as
compared to older top managers. In sum, manuscript 1 provides an up-to-date picture of
the relevance of the doctorate for top managers, showing that this educational credential
is still quite prevalent among top managers of large German companies.
However, in our event study we could not find support for the idea that the appointment
of top managers with a doctorate generally results in more positive reactions from the
stock market. Only under certain conditions (i.e. depending on the field of study in
which the doctorate was obtained and on the industry in which the firm operates) does
the doctorate of a top manager make a difference in the evaluations of stock market
investors. Results of more detailed analyses show a positive market reaction only when
a top manager with a doctorate from the fields of engineering or natural sciences is
appointed to a company of the manufacturing sector. One interpretation of this finding
is that in these companies, in which technology as well as research and development
processes are of great importance, the knowledge and skills associated with a doctorate
from the fields of engineering or natural sciences might be particularly valuable. This
conclusion lends credence to the view that in German companies of the manufacturing
sector, high value is attached to the technical expertise of employees, including top
managers (Davoine & Ravasi, 2013; Lane, 1989; Mayer & Whittington, 1999).
31
Overall, the results of the event study do not provide evidence for a generally positive
effect of the doctorate and, therefore, little explanation for why the share of top
managers with a doctoral degree is generally quite high. As our descriptive analysis has
shown, even in industries where this share is lowest, nearly one in four top managers
hold such a degree. To propose an additional explanation for the prevalence of the
doctorate in the upper echelons of German companies, we draw on social psychological
approaches. The “similarity-attraction paradigm” (Berscheid & Walster, 1978; Byrne,
1971; Duck & Barnes, 1992; Nielsen, 2009; Schmid & Dauth, 2012) provides a
compelling rationale in this regard, suggesting that top managers with a doctorate are
more likely to reach the board level because of homosocial reproduction (Domhoff,
2002; Kanter, 1977; Useem & Karabel, 1986). More specifically, given that the
doctorate is highly prevalent among executives at the top level of firms, similarity
attraction biases should make current members of the top management team tend to
favour those candidates who share this characteristic (Boone et al., 2004; Westphal &
Fredrickson, 2001; Westphal & Stern, 2006; Zajac & Westphal, 1996). This bias could
be particularly salient in the upper echelons of the top firms in Germany (such as the
DAX-30 firms), considering that the corporate elite in Germany is often depicted as a
close-knit social network whose members share similar norms, values, and social
backgrounds (Hartmann, 2001; Kengelbach & Roos, 2006; Oehmichen et al., 2010;
Rickens, 2008; Schmid & Dauth, 2012).
5.1.2. Contributions of manuscript 2
Manuscript 2 adds to the literature by shedding light on a functional executive largely
neglected in prior research: the CFO. The bulk of research on executives and, even
more so, on executive compensation has examined either top management teams on an
32
aggregate level or CEOs (Menz, 2012; Uhde et al., 2017). There is a nascent research
stream on functional top managers which our manuscript extends (Menz, 2012). Prior
works in this field have examined C-suite executives such as the chief operating officer
(e.g. Hambrick & Cannella, 2004; Marcel, 2009), chief information officer (e.g. Preston
et al., 2008; Schobel & Denford, 2013), or chief strategy officer (e.g. Angwin et al.,
2009; Menz & Scheef, 2014). Although the CFO arguably is the second most important
executive in many firms (Six et al., 2013; Zorn, 2004), scholars have noted that there is
a dearth of knowledge about the individuals holding this position (Mian, 2001; Six et
al., 2013). In particular, as CFOs in MNCs are responsible for firms’ financials and
strategies that are highly international, Chua (2007, p. 491) asks the question of “[w]hat
are the skills required of a CFO in contemporary business as he/she traverses the globe
doing business in diverse cultural settings?” So far, only practitioner-oriented literature
has addressed this question, frequently recommending international work experience as
an essential characteristic of CFOs (Ernst&Young, 2010, 2013; FinancialExecutive,
2012; Johnson, 2015; Michael Page International, 2012).
Manuscript 2, which is anchored at the intersection of executive characteristics and
executive compensation literature, empirically investigates the effects of international
work experience for CFOs. Following the popular assertion that international work
experience is beneficial for CFOs would lead to the suggestion of a positive relationship
between CFOs’ international work experience and their compensation. However, we
take a more comprehensive view on the effects of international work experience by
drawing on findings from literature on international careers (Bolino, 2007; Dickmann &
Harris, 2005; Schmid & Wurster, 2017; Shaffer et al., 2012). More specifically, we
account for a downside that working abroad has for individuals, which is the separation
from social networks in the organization’s home country (Georgakakis et al., 2016;
33
Hamori & Koyuncu, 2011). Accordingly, an inverted U-shaped relationship between
international work experience and compensation is proposed and empirically supported,
leading to the conclusion that more international work experience is not always better.
This finding extends the current view on executives’ international work experience,
which focuses primarily on the benefits of such experience. This view is held not only
in practitioner-oriented literature but also in extant research on the relationship between
executives’ international work experience and their compensation (Carpenter et al.,
2001; Ernst&Young, 2010, 2013; FinancialExecutive, 2012; Johnson, 2015; Michael
Page International, 2012; Peng et al., 2015; Schmid & Wurster, 2016). A more nuanced
view on international work experience might have practical implications for the career
planning of individuals who aim to reach the CFO position: the extremes of attaining
very low or very high levels of international work experience should be avoided;
instead, a moderate level promises the largest pay-off in terms of compensation.
Moreover, in order to reduce the detrimental effects of working abroad, individuals
should engage in activities designed to keep their relationships with network contacts in
the organization’s home country intact.
Manuscript 2 generates additional insights by investigating CEOs’ international work
experience as an important boundary condition in the relationship between CFOs’
international work experience and their compensation. With this approach we follow a
recommendation of Finkelstein et al. (2009) who, after reviewing prior literature on
executive characteristics, call for the use of moderator variables to gain a more detailed
view on how and when executive characteristics have an impact. By considering CEOs’
characteristics as a contingency factor influencing how CFOs’ human and social capital
are evaluated and reflected in compensation, we acknowledge prior literature noting that
34
the “fit” between the CEO and CFO is crucial for a CFO’s job performance (Hambrick
& Cannella, 2004; Menz, 2012).
At the theoretical level, the combination of human capital and social capital
perspectives answers calls in the literature to employ several theoretical lenses in order
to explain the determinants of executive compensation (Finkelstein et al., 2009; Gomez-
Mejia & Wiseman, 1997). In executive compensation literature, there are various
studies that examine the effects of either executives’ human capital (e.g. Carpenter et
al., 2001; Finkelstein & Hambrick, 1989; Harris & Helfat, 1997) or social capital (e.g.
Engelberg et al., 2013; Geletkanycz et al., 2001) on their compensation. Rarely have
both forms of capital been considered in tandem, although their interdependent nature
has been acknowledged in the literature (Coleman, 1988; Haynes & Hillman, 2010;
Nahapiet & Ghoshal, 1998; Sundaramurthy et al., 2014). Therefore, manuscript 2
contributes to the field by providing an account of how an executive’s experience, in
this case international work experience, shapes not only the knowledge, skills, and
abilities (human capital) but also the network ties (social capital) of that executive. We
argue that it is important to consider both forms of capital when investigating the effects
of executive experiences on their compensation for two reasons: on the one hand, if an
experience increases both forms of capital, a stronger case for a positive impact of that
experience on compensation can be made. On the other hand, if an experience increases
an executive’s human capital while it decreases social capital, the association of that
experience with compensation might take more complex forms (such as an inverted U-
shaped form).
35
5.1.3. Contributions of manuscript 3
Manuscript 3 adds to our knowledge about determinants of CEO compensation levels in
Europe. Because of the prevailing focus on US companies in executive compensation
research, determinants of executive compensation that apply specifically to non-US
firms have received relatively little attention. However, as CEO pay levels in Europe
have increased over the years, there are concerns that European pay levels might
converge to US standards (Anonymous, 2008; Carter et al., 2009; Cheffins, 2003;
Murphy, 2005). Therefore, the factors that are associated with rising CEO pay levels in
Europe are of great interest not only for researchers and top managers but also for other
corporate governance actors and policymakers. Manuscript 3 offers insights on what
determines CEO pay levels in Europe by providing theoretical underpinning and
empirical evidence for the association between various dimensions of Americanization
and CEO pay levels.
Prior studies dealing with the influence of Americanization on executive compensation
in other countries have mostly examined the use of equity-based pay components (e.g.
Chizema, 2010; Fiss & Zajac, 2004; Geng et al., 2016; Melis et al., 2012; Sanders &
Tuschke, 2007), and not pay levels as does our study. Furthermore, by investigating
various dimensions of Americanization we extend prior research that has largely
focused on Americanization of the firm. We find that Americanization of the CEO, of
the firm, and of the industry is positively associated with CEO compensation levels in
European firms. Hence, we develop a novel and more comprehensive understanding of
Americanization and demonstrate its influence on CEO compensation.
More specifically, we confirm previous studies that have shown a positive relationship
between Americanization of the firm and CEO pay levels (Gerakos et al., 2013;
36
Fernandes et al., 2013; Oxelheim & Randøy, 2005). But beyond that, we highlight that
Americanization of the CEO and Americanization of the industry also have a positive
influence. The finding that Americanization at the individual level can impact the
adoption of pay practices from the US context resonates with the view that executives’
experiences and psychological properties shape their decision making (see section 2.2).
This is illustrated in the statement of a compensation consultant who said that many
European and Asian executives show a distaste for very large pay packages which is
“deeply rooted in their culture and views that you just don’t seek unlimited money”
(Johnston, 1998). In this regard, our study suggests that European CEOs who are
Americanized, for example because they spent parts of their education or professional
career in the US, might have less such restraints. Concerning Americanization of the
industry, our findings reveal that in industries dominated by firms from the US,
European firms are under pressure to keep up with their US counterparts and offer
higher compensation to their CEOs. This can be interpreted as a form of intra-industry
mimetic behaviour (Fligstein, 1985; Haveman, 1993; Lieberman & Asaba, 2006). A
practical example of this behaviour is presented in the case of SAP, a German software
firm which came under criticism for paying its CEO 15 million EUR as annual
compensation for 2016. However, Hasso Plattner, SAP’s chairman of the supervisory
board, justified the high pay pointing out that at competitors such as Oracle or
Salesforce, both from the US, CEOs receive around 40 million USD. He added: “The
compensation for our management board members needs to be internationally
competitive, considering our global competitors” (SpiegelOnline, 2017).9
Besides broadening the view on Americanization and the link to CEO pay, we also
present more in-depth insights about this link by delineating the moderating role of
9 Quotation translated by the author.
37
CEO power. Our argumentation is grounded in an innovative combination of neo-
institutional theory with managerial power theory, which answers calls in the literature
urging the use of several theoretical perspectives in order to develop compelling
explanations of executive pay determinants (Eisenhardt, 1988; Finkelstein et al., 2009;
Gomez-Mejia & Wiseman, 1997). Our approach accounts for the important aspect of
power relations among corporate governance actors in the adoption of novel (pay)
practices (Aguilera & Jackson, 2010; Greenwood & Hinings, 1996; Westphal & Zajac,
1994). The results of our study show that powerful CEOs are able to magnify the
positive effects that Americanization has on CEO pay levels. Thus, we shed light on
how powerful CEOs can take advantage of exposure to multiple institutional
environments so as to adopt organizational practices that are beneficial for them. This
finding also adds to the literature on managerial power theory. While this literature
provides robust evidence for a positive relationship between managerial power and
executive pay (Van Essen et al., 2015), the mechanisms behind this association are yet
to be appropriately explored. Our study shows that one such mechanism could be that
powerful CEOs are in a position to strengthen some of those forces that positively affect
CEO compensation levels.
5.2. Limitations and future research
This thesis has some limitations that need to be acknowledged. One limitation that
pertains to all three research manuscripts arises from the selection of samples. Each
manuscript is based on a specific sample comprised of top managers of firms that share
certain characteristics and are from certain geographic regions, which limits the
generalizability of the findings. As all manuscripts deal with top managers of large
listed companies, the findings of this thesis should not be uncritically generalized to
38
smaller firms or firms of different legal forms. Furthermore, as each sample used in the
manuscripts has a limited geographical scope, the results may not generalize to other
regions in the world. This issue is evident in manuscript 1, because the high percentage
of doctoral degree holders among top managers is a feature quite specific to German
speaking countries (Davoine & Ravasi, 2013; Franck & Opitz, 2004). The findings of
manuscript 2 should also be seen in the European context of the investigation, where
international work experience might be especially beneficial for CFOs, since
management in Europe involves a high degree of international and intercultural
challenges (Calori et al., 1995; Kaplan, 2014). Similarly, the effects of Americanization,
as described in manuscript 3, may not generalize to other parts of the world where
exposure to the US environment might play a less important role.
Another limitation that applies, to varying degrees, to all three research manuscripts
derives from the use of top managers’ demographic characteristics as proxies for
underlying constructs that are not directly measured. This approach, commonly used
and recommended in much of top management research (Carpenter et al., 2004;
Finkelstein et al., 2009; Hambrick & Mason, 1984; Pfeffer, 1983), has as its major
advantage that information on demographic characteristics are often readily available,
especially in the case of top managers of large and listed companies, and they can be
reliably measured. In contrast, psychological properties and other non-observable
characteristics of top managers are difficult to gauge (Finkelstein et al., 2009; Hermann
& Datta, 2005; Nielsen & Nielsen, 2011). Furthermore, given that top managers usually
are “unwilling to submit themselves to scholarly poking and probing” (Hambrick, 2007,
p. 337), the use of demographic characteristics provides a more viable approach to
achieve large sample sizes required for quantitative empirical analysis. However, the
main drawback of the demographics-based approach is that the assumed intervening
39
constructs and processes which are purported to link demographic characteristics with
outcomes usually remain unmeasured and untested – the so-called “black box” problem
(Dauth, 2012; Lawrence, 1997; Pettigrew, 1992; Priem et al., 1999). This problem is
well acknowledged in research relying on demographic characteristics and constitutes a
major limitation (Carpenter et al., 2004; Finkelstein et al., 2009). To bridge the gap
between demographic characteristics and outcomes, future research could draw on other
empirical designs that allow more direct examination and thick description of actors and
processes (Birkinshaw et al., 2011; Snow & Thomas, 1994). For example, in order to
supplement the findings of manuscript 1, further research could employ interviews with
investors to explore in more detail how they evaluate the doctoral degree of newly
appointed top managers. To substantiate and enrich the findings of manuscript 2 and
manuscript 3, future studies could use case studies that allow up-close observation of
compensation setting processes (Gibbert et al., 2008).
Besides the general limitations discussed above, each individual manuscript is subject to
some additional, specific limitations that also suggest future research opportunities.
Manuscript 1 investigates top managers of the DAX-30 firms, i.e. the 30 largest listed
firms in Germany. It would be an interesting avenue for further studies to investigate the
role of the doctorate of top managers in small and medium sized firms or in those firms
belonging to the Mittelstand. It can be supposed that in such firms the doctorate is less
important for top managers, considering that previous research has found that larger
firms are more likely to appoint top managers with doctoral degrees (Opitz, 2005b).
Moreover, the development of the relevance of the doctorate over time merits further
investigation, given many voices in the popular press claiming that the importance of
the doctorate for top managers is dwindling (Engeser, 2011; Löhr, 2014). In this
context, it could also be analysed if other educational credentials (e.g. MBA titles) or
40
certain career experiences (e.g. work experience abroad or in renowned management
consultancies) are becoming more relevant (Franck et al., 2004; Opitz; 2005b; Schmid
& Wurster, 2017). Time series analysis might be a promising research approach for
such an endeavour. Finally, manuscript 1 has limitations pertaining to the event study.
The stock market reactions to the appointment of a new top manager reflect investors’
anticipation of future performance implications. However, realized operating
performance is not measured (Gerpott & Jakopin, 2006; Lubatkin & Shrieves, 1986;
Oler et al., 2008; Schmid & Dauth, 2014). It could be a fruitful avenue for future
research to investigate the association between the doctorate of top managers and
realized firm performance (e.g. measured in terms of return on equity or return on
assets). The results of manuscript 1 suggest that the firm’s industry and the field in
which the doctorate was obtained might be important factors influencing this
association. Such an investigation would add to the literature on the relationship
between top managers’ characteristics and firm performance (Finkelstein et al., 2009;
Hiller & Beauchesne, 2014; Schrader, 1995), which, so far, has left the doctorate
unexplored.
Concerning manuscript 2, one limitation is that the analysis of contextual aspects
encompasses only the CEO. The study shows that the CEOs’ level of international work
experience has a moderating influence on the relationship between CFOs’ international
work experience and their compensation. However, the rest of the TMT is not
examined. It can be argued that it is not only the international work experience of the
CEO but of the whole TMT that plays a moderating role in the relationship between
CFOs’ international work experience and their compensation. By considering the entire
TMT, such an approach could yield stronger explanations than focusing only on the
CEO-CFO-duo (Hambrick, 2007). Thus, future works could investigate moderating
41
effects of TMT international work experience to generate further insights. Moreover, it
would be interesting to explore the effects of CFOs’ international work experience on
further outcomes at the individual level. While compensation might be one possible
measure for career success, other measures such as career progression, career stability,
or job satisfaction might also be influenced by international work experience. Finally, a
promising extension of the research focus of manuscript 2 would be to investigate the
impact of CFOs’ international experience on firm-level outcomes. Prior studies that
have examined the relationship between CFOs’ characteristics and outcomes at the firm
level have focused on characteristics such as gender, prior M&A experience, or
educational background (Aier et al., 2005; Huang & Kisgen, 2013; Uhde et al., 2017),
and on outcomes such as acquisitions performance, divestiture policies, or earnings
management (Krishnan et al., 2011; Six et al., 2013). Only recently have researchers
begun to explore the effects of CFOs’ international experience on outcomes at the firm
level. In this regard, Dauth et al. (2017) show that CFOs’ international education and
international work experience are positively associated with accounting quality. To add
to this literature, future studies could investigate the effect of CFOs’ international
experience on further financial or accounting outcomes, or on firm performance.
Manuscript 3 is limited in that effects of Americanization and CEO power on the
adoption and use of particular components of CEO compensation packages are not
examined. Manuscript 3 provides empirical evidence for a positive relationship between
Americanization and the total level of CEO compensation, and for a positive
moderating influence of CEO power. However, it remains unclear which pay
components account for the increase in total compensation levels. Further research
investigating the adoption and use of specific equity-linked compensation components
could yield important insights on how the increase in CEO compensation levels is
42
achieved. It is a distinctive feature of executive compensation in the US that equity-
linked compensation components make up a large part of overall compensation
(Cheffins, 2003; Fernandes et al., 2013). At the same time, equity-linked compensation,
such as stock options or restricted stock, has been blamed for the steep increase in
compensation levels in the US over the past decades (Anonymous, 2014; Frydman &
Jenter, 2010; Murphy, 2013). While prior research has found that Americanization is
related to the adoption of certain equity-linked components in European firms
(Chizema, 2010; Geng et al., 2016; Melis et al., 2012; Sanders & Tuschke, 2007),10
it
remains unexplored how CEO power shapes these adoption processes. Related previous
studies have shown that powerful CEOs are able to influence the adoption and
implementation of pay components to their own benefit (Abernethy et al., 2015; Fiss &
Zajac, 2004). On this basis, future works could examine if powerful CEOs can leverage
Americanization to adopt specific US-style pay components that increase their total
compensation.
Another limitation of manuscript 3 is that potential downsides of Americanization in
Europe are not analysed. However, our findings could inform future research in this
field. Our multi-dimensional conceptualization of Americanization could serve as a
basis for future studies that want to investigate how the different dimensions of
Americanization are related to undesirable consequences. Such consequences might be
a higher dismissal risk for CEOs in poorly performing firms, considering prior studies
that report a higher firm performance – CEO dismissal sensitivity in the US than in
Europe (Crossland & Chen, 2013; Oxelheim & Randøy, 2013). There might also be
downsides of Americanization for certain stakeholders of the firm. Ahmadjian and
10
In a related study, Schmid & Wurster (2016) have found that the structure of executive pay is
influenced by the internationalization of the supervisory board. More specifically, a higher
internationalization of the supervisory board is positively associated with the variable to fixed ratio of
executive pay.
43
Robbins (2005) and Ahmadjian and Robinson (2001) have shown that in Japan,
Americanization led to firm downsizing, i.e. decreases in the number of employees.
Hence, as Americanization is strongly associated with shareholder value orientation,
other stakeholders of the firm, such as employees, might be adversely affected. In this
context, further studies could investigate if the dimensions of Americanization outlined
in manuscript 3 can be related to such outcomes in Europe. Finally, future works could
examine a possible effect of Americanization on the pay gap between executives and
average workers of a firm, given that this gap is much larger in the US than in Europe
(Anonymous, 2016; Kiatpongsan & Norton, 2014; McCall, 2004). Larger pay
dispersion can have far-reaching implications not only for a firm (Bloom, 1999;
Connelly et al., 2016; Grund & Westergaard-Nielsen, 2008), but also for the society,
because a growing gap between top executive and average employee pay might increase
income inequality (McCall & Percheski, 2010; Morris & Western, 1999; Piketty, 2014;
Piketty & Saez, 2003, 2006). Thus, exploring the link between Americanization and pay
dispersion could be an important avenue for further research.
44
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