Management compensation systems in MNCs and domestic firms: cross-national empirical evidence.
| Verfasser | Le, Hang |
| Posten | RESEARCH ARTICLE |
Abstract:
* This is a study of the relationship between institutional settings and managerial compensation systems, based on extensive cross-national survey evidence.
* We compare differences in practices between Multinational Corporations (MNCs) and domestic firms across a range of capitalist archetypes.
* We find that MNCs are more likely to promote compensation systems that incentivise managers in line with organisational performance compared to domestic firms. Our findings also reveal persistent diversity reflecting firm type and institutional setting. We find that the gap between MNCs and domestic firms in terms of the usage of incentive-related compensation is less pronounced in Liberal Market Economies than in other settings. This suggests that it is a combination of being an MNC and the specific home locale that moulds approaches to managerial compensation. This reflects considerable hybridisation of practices within and between settings.
Keywords: Management compensation * MNCs * Shareholder rights * Institutional setting
Introduction
This paper examines the relationship between institutional settings and managerial compensation systems based on extensive cross-national survey evidence. We compare differences in practices between Multinational Corporations (MNCs) and their domestic counterparts across a range of capitalist archetypes. Our focus is the link between a firm's geographical diversification strategies and two dimensions of managerial compensation, namely monetary and non-monetary rewards. Contingent compensation that rewards managers in line with overall organisational financial performance (such as stock options) plays an important role in aligning the interests of managers and shareholders within liberal market economies (LMEs) (Dote 2000; Erturk et al. 2008; Froud et al. 2006). In contrast, within coordinated market economies (CMEs), the incentives under which managers operate are more diffuse, and encompass the ability to develop and maintain relationships with stakeholders and industry associations (Dote 2000). We explore whether MNCs differ from their domestic counterparts in terms of using different compensation mechanisms and whether the difference, if any, varies with the institutional settings of the MNCs' countries of origin. To do this we use a unique dataset, which contains information about domestic and multinational firms operating in 18 countries. Our sample is considerably larger and more comparative than those used in previous studies of management compensation, which mainly focus on developed economies such as Canada, Germany, Japan, the UK, or the USA (Crossland and Hambrick 2007; Fey and Furu 2008; Oxelheim and Randoy 2005; Southam and Sapp 2010). In contrast our analysis is based on a dataset that covers a range of institutional settings, encompassing developed, emerging and transitional countries in or in close proximity to Europe.
Our contribution to the literature is three-fold. First, we find that firms may compensate for the challenges posed by institutional settings in a manner that has the potential to make for complementarities rather than simply additional inefficiencies or costs (Gordon and Roe 2004, p. 16). Second, we find further evidence on the consequences of spatial dispersion on the compensation strategies by MNCs. Third, we find that firms rarely practice "pure" forms of "calculative" or "co-operative" human resources management, contrary to what is suggested in much of the literature (Carpenter et al. 2001) rather, firms are likely to "mix and match" interventions in response to the pressures posed by locale and firm type. The rest of the paper is structured as follows. The next section provides a review of related literature and outlines our hypotheses. Section 3 describes our methods and data. Section 4 presents our empirical results. Section 5 discusses the results and their implication. Section 6 summaries and concludes.
Related Literature and Hypotheses Development
Institutional Settings, Geographic Diversification and Management Compensation
Diversification, industrial and geographical, increases firm complexity and hence the information-processing task that the management faces. According to Fama and Jensen (1983) it is costly to transfer specific information relevant to decisions between internal agents in complex organisations. This proposition has two important implications. Firstly, managers in complex firms need to gather and process more information for their decisions than their counterparts in less complex firms. Secondly, the demands of information-processing increase with firm complexity. Diversification is an important contributor to firm complexity, increasing the information-processing task that the management faces (Finkelstein and Hambrick 1989; Musteen et al. 2009) especially due to divisional interdependence in related-diversified firms and internal capital markets in unrelated-diversified firms (Jones and Hill 1988). Henderson and Fredrickson (1996) report that compensation is indeed positively related to the information-processing demands resulted from firm's diversification scope.
Existing literature suggests that geographical diversification may influence the management compensation practice differently compared to industrial diversification. Roth and O'Donnell (1996) point out that geographical diversification offers some unique aspects of firm complexity (see also Gomez-Mejia and Palich 1997). Managers of geographically diversified firms, i.e. MNCs, are expected to have different skills (e.g., language skills and wider global knowledge) compared to managers of domestic firms (Oxelheim and Randoy 2005). Given the complex environment in which MNCs operate, managers also have increased responsibility (Oxelheim and Randoy 2005; Carpenter and Sanders 2004). Further Nohria and Ghoshal (1994) argue that geographical diversification heightens the ambiguity surrounding management's actions (Fey and Furu 2008; Kim et al. 2005). Hence, a compensation premium and a stronger emphasis on contingent pay may be necessary as internationalisation increases (Wiseman and Gomez-Meija 1998; Oxelheim and Randoy 2005), and will be enhanced as the skills and competences required to manage international firms become scarcer (Oxelheim and Randoy 2005).
A particularly important distinction between the management compensation mechanisms used by MNCs and domestic firms is rooted in the assertion that the former is moulded by the institutional settings of both home and host countries while the latter is under the influence of the home country institutional setting only (Filatotchev and Wright 2011; Oxelheim and Randoy 2005; Schuler and Rogovsky 1998). In comparing institutional settings, an influential school of thinking has been the comparative capitalisms literature (see Jackson and Deeg 2008). Here Dote (2000) draws a key distinction between the shareholder dominated varieties of capitalism, where managers are closely reined in and have to maximise returns, and the more stakeholder orientated varieties of capitalism, where the interests of workers and owners are systematically mediated with a stronger emphasis on retention and investment. In a landmark 2001 collection, Hall and Soskice (2001) define the former as Liberal Market Economies (LMEs), examples being the USA and the UK, and the latter as Coordinated Market Economies (CMEs), examples being Germany, Japan and Scandinavia. Significantly, Hall and Soskice (2001) hold that both models are equally viable, with each context having its own complementary sets of rules and practices. Hall and Soskice (2001) also acknowledge that many developed countries fit into neither category and that other societies may persistently combine features of both such as the emerging market economies of post-communist Central and Eastern Europe and the mixed market economies of Mediterranean Europe (Hancke et al. 2007). (1)
Within the context of LMEs, management compensation, more specifically rewards linked to overall financial performance via share-based incentives, is considered as an important corporate governance mechanism to align the interests of managers with those of shareholders in order to mitigate agency problems (see e.g., Jensen and Meckling 1976; Murphy 1999; Froud et al. 2006; Dore 2000). From this shareholder value perspective, managerial compensation is seen as a powerful incentive mechanism for the governance of MNCs' cross-border operations, ensuring that MNCs originated from LMEs do indeed maintain the shareholder value agenda (Filatotchev and Wright 2011; Tihanyi et al. 2009; Sanders and Carpenter 1998; Jensen and Murphy 1990). Gomez-Mejia (1992) argues that management compensation should be designed to ensure that the extent of a firm's diversification really improves its performance. This is because other mechanisms to reduce agency problems such as monitoring or bonding of managers may be more difficult to implement in MNCs due to ownership in different cultures (Sanders and Carpenter 1998; Tihanyi et al. 2009). Indeed Sanders and Carpenter (1998) find that compensation is linked to more severe agency problems between shareholders and managers arising from a firm's geographical dispersion of its production.
In contrast, in CMEs managers are less likely to operate under such incentives and, hence, will devote more attention to building relations with a wide range of stakeholders. This reflects a very different historical understanding of the firm as an entity that has dense and rich ties to a wide range of stakeholders, and has obligations to the industry and society at large (Hall and Soskice 2001; Whitley 1999). Hence, managers would be seen more as stewards of an entity that has a wider societal purpose in its own right, rather than simply as a vehicle for the enrichment of shareholders (Hall and Soskice 2001; Whitley 1999). As shareholder rights are weaker, reining in...
Um weiterzulesen
FORDERN SIE IHR PROBEABO ANCOPYRIGHT GALE, Cengage Learning. All rights reserved.
