Behavioral Aspects of the Executive Compensation Setting Process

Three experimental research studies investigate factors within the executive compensation process and the effects these factors have on the pay-for- performance paradigm. The first study examines the influence of individual anchoring and the effects of private versus public decisions upon compensation awards by subjects role-playing as either an outside CEO or a non-CEO director. The second study examines affect as an influencing factor on individual decision makers in the compensation setting process. The third study examines group decision making as compared to individual decisions when making compensation awards. These studies provide evidence that individal anchors, individual performance, individual affect, and the group decision process may add to agency costs in the corporate governance structure, and may be contributing factors in the imperfection of the pay- for-performance paradigm.