This paper has broadened the usual empirical approach to the study of executive compensation. In the first place, a broad concept of complexity and power has been developed and their influence on executive compensation has been tested. Prior research has never tested how the concept of complexity influences compensation contracts despite strong theoretical ground and compensation consultants’ inclusion of complexity in job evaluation work. Suggested more than 15 years ago as a potentially important determinant of executive pay (Finkelstein and Hambrick, 1989), the complexity-pay relation has received very little attention ever since and operationalization of complexity has by and large been limited to single sources of complexity such as firm diversification (Finkelstein and Hambrick, 1989) and internationalization (Sanders and Carpenter, 1998). By building and testing a multidimensional framework of complexity, this work shows the large explanatory power of complexity in explaining top management pay levels and structure. Two of the analyzed dimensions of complexity - market uncertainty and politicized environment - have not received any attention in prior research. Although power has attracted much more attention from compensation researchers, empirical results are often inconsistent and ambiguous. Therefore, Finkelstein and Hambrick (1996) suggest that a formal test of the power hypothesis is needed, one that incorporates multiple aspects of executive power and allows for a more definitive statement about the effects of power on executive compensation. In this paper I have developed and tested a framework of executive power that incorporates multiple dimensions.
KeywordsStock Option Executive Compensation Total Compensation Compensation Level Compensation Committee
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