Keywords: executive compensation, firm performance, managerial ability, motivation, strategic choice, agency theory, upper echelons theory, motivation theory
Evaluating the missing links in the relationship between executives' compensation and firm performance
The research on the relationship between executive compensation and firm performance is extensive but has produced inconsistent results and, typically, weak explanatory power. One cause of these results is use of an incomplete theoretical framework that ignores some variables that are related to these two concepts. We explore the missing links between them. The paper contributes to scholarly and practical understanding of this important issue in the literature by extending and combining agency theory, upper echelons theory, and motivation theory perspectives. The paper develops a model that describes and explains the interactive relationship between executive managerial ability, executive compensation, strategic choices and firm performance. It puts forward the argument that executive managerial ability is related to strategic choices, and executive compensation moderates this relationship. Additionally, the paper suggests that strategic choice is an important variable that has not been explicitly accounted for in the relationship between compensation and firm performance.