Pay Schemes: Their Micro and Macro Level Dynamics within Organizations

Compensation is multifaceted, extending beyond base salaries and bonuses to include financial instruments such as stock options and restricted stocks. This complexity introduces variability among employees in terms of pay amount and pay duration—the time until compensation benefits are realized. Extant literature highlights that employees’ behaviors and decisions are influenced not only by their own pay but also by that of other employees, particularly those in higher ranks. This raises the question of whether and how employees receiving complex compensation packages react to disparities, not only in monetary terms but also in other dimensions of pay. The first chapter delves into this underexplored area by investigating the effect of the disparity in pay duration between CEOs and non-CEO executives on the departure decisions of non-CEO executives. We find that greater pay duration disparity increases voluntary non-CEO executive departures, potentially because it signals a delay in promotion opportunities and reflects the board’s valuation of the executive. Furthermore, our study reveals heterogeneous responses to pay duration disparities depending on factors affecting promotion expectancy. This finding constitutes the first empirical evidence of employee responses to temporal pay disparities beyond monetary amounts. While gender inequalities in compensation are well-documented across various sectors, reports vary on the extent and nature of these inequalities in CEO compensation. Potentially limiting our understanding of these inequalities is the focus on disparities in pay amounts among CEOs, which may mask inequalities in structural processes that influence pay distribution at the CEO level. The second chapter addresses this gap by examining potential differences between female and male CEOs in two key criteria that guide performance-pay allocation: the number of performance goals and the length of performance evaluation periods. Performance-based pay, which constitutes a significant portion of CEO compensation, relies heavily on these criteria, making their analysis crucial for understanding gender disparities at the CEO level. We explore variations in these performance evaluation criteria for CEOs. The findings reveal that female CEOs often face stricter evaluation criteria, particularly in male-dominated boards and when they have limited past managerial experience. This study contributes to the strategic management literature by providing insights into the complex structures of compensation packages and performance evaluation processes, emphasizing the need for fairer compensation systems that consider gender equity at the CEO level. The third chapter investigates the events involving the vesting of long-term payments to the CEO and their impact on the firm's legal strategy in handling subsequent lawsuits. Prolonged lawsuits incur rising legal costs, divert resources from core business activities, and potentially harm the company's reputation. To avoid long-term penalties associated with lengthy lawsuits, firms may seek early settlements, though these can be costly and reduce short-term stock value. Managers face a trade-off between avoiding prolonged legal battles and deferring the legal process to maintain current stock values. Given research linking long-term payments with myopic loss aversion, we expect CEOs vested with long-term compensation before lawsuits to prioritize maintaining payment value over long-term firm benefits. Examining lawsuits against firms, we find a positive relationship between long-term compensation value and lawsuit duration that is more pronounced among CEOs who display a tendency to hold onto their options. In turn, lawsuit duration is negatively linked with firm performance and earnings. This study reveals a novel link between long-term CEO compensation and corporate legal strategy, shedding light on the potentially adverse effects of long-term incentives.