The impact of cultural and social values on executive compensation

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The objective of this research is to investigate how cultural and social values affect executive compensation. Many surveys of the vast literature on executive compensation agree that conventional approaches, for example those on standard principal-agent theory, cannot explain a large part of the variation in executive compensation. While some researchers suggested to include contextual information more than two decades ago, little research has been forthcoming that addresses the impact of cultural and social values on the design of compensation contracts. This grant proposal advocates to use new data sources to match compensation data with data on cultural and social values by pursuing three lines of analysis. The first line of analysis is theoretical and develops mathematical models of executive compensation that include cultural and social values. This conceptual step goes beyond conventional models that allow only for monetary motivation and neglect the wider social context. The second line of analysis investigates the impact of cultural and social values on the design of executive compensation contracts based on the assumption that all relevant factors that influence pay-setting are affected by these values. The third line of analysis hypothesizes that top executives also value their social status and are concerned about their social recognition. Therefore, they are willing to trade-off benefits they obtain from social status against purely monetary compensation.