CEO Overpayment and Dismissal: The Role of Attribution and Attention. (21st October 2015)

• Record Type: Journal Article
• Authors: He, Lerong; Fang, Junxiong
• Is Part Of: Corporate governance. Volume 24:Number 1(2016:Jan.)
• Page Start: 24
• Page End: 41
• Publication Date: 2015-10-21
• Subjects: Corporate Governance -- CEO Turnover -- Executive Compensation -- Pay Deviation -- China; Corporate governance -- Periodicals; 658.1145
• DOI: 10.1111/corg.12129
• Languages: English
• ISSNs: 0964-8410

Abstract

Abstract: Manuscript Type: Empirical Research Question/Issue: This study investigates the moderating role of CEO overpayment on the relationship between firm performance and CEO dismissal. We also examine how contextual factors, including compensation disclosure regulation, firm index status, and firm age, influence board attention and attribution, and consequently affect the sensitivity of CEO dismissal to firm performance. Research Findings/Insights: Using a sample of Chinese listed firms between 2002 and 2011, we find that overpaid CEOs are associated with a larger likelihood of dismissal in case of poor firm performance compared to their underpaid counterparts. In addition, CEO overpayment has a larger influence on the turnover‐performance relationship when executive compensation disclosure is mandatory, when a firm is index‐included, or younger. Theoretical/Academic Implications: This study provides empirical support for attribution theory and the attention‐based view. Built on the concept of bounded rationality, it demonstrates that board sense‐making and causal attributions affect the CEO dismissal decision. Our study also sheds light on the influence of situational cues on shaping board attention and subsequent corporate governance decisions. Practitioner/Policy Implications: This study offers insights to policymakers interested in enhancing the design of corporate governance mechanisms by paying attention to cognitive processes in the boardroom.