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Does social capital

provide the power to

extract rents?

Coupling social network theory and managerial power approach

Lisa Stein S1323520

ljustein@gmail.com

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Abstract

How come that even with a compensation committee which is supposed to protect shareholders’ interests, executives still manage to negotiate outrageous compensation packages? This thesis researches the managerial power approach to executive compensation, examining how powerful executives extract more rent. The concept of power is linked to social network theory, which hinges on the concept that the structure of a person’s social network can provide the individual with a better bargaining position. This concept was tested using 2004 data on executive compensation and board structure. Results are limited in significance but do support the hypothesis that the structure of social networks result in bargaining power that can be used to extract rents.

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1. Introduction

Executive compensation is on the rise, and as it continues to do so, more and more people voice their disagreement. The ratio of executive pay compared to worker pay in the United States has increased sevenfold between 1982 and 2003 (Chan, 2008). While the mentioned ratio of 301:1 is tremendous, this is nothing more than an average ratio. Therefore, there are instances for which this ratio is even higher. Only in excessive cases, such as recently with the bonuses that were paid to ING management even though they received state support to deal with the crisis, the public makes itself heard, sometimes even leading to repayment of (part of) the compensation.

If executive compensation is higher than desirable, why is there no mechanism to curb this phenomenon? In the current structure of determination of executive compensation, the shareholders of a company, being the owners and therefore the ultimate decision maker in the company, are ultimately responsible for the compensation packages. However, as they are not involved in the daily routine of managing the company, they delegate this responsibility to the board of directors, or even a compensation committee within the board, of the company. The compensation committee prepares a proposal package which is presented in the annual meeting of shareholders. In many countries, the shareholders have the final say with regards to executive compensation as they approve the proposed package.

Even though there are regulations that govern the independence of the compensation committee, judging by current discussions, executives manage to extract more money from the companies than would be expected given their performance. Apparently, executives are somehow able to extract rents from the company for their personal gain. How come that even with a compensation committee consisting fully of independent directors, executives still manage to negotiate compensation packages that are less than optimal from the shareholders’ point of view?

Aim and added value of the research

This research aims to provide a theoretical model of the manner in which executives can exert influence over their compensation package. It does not aim to provide a definition of outrageous compensation, nor to propose an optimal compensation structure. It does seek to explain how executives can exert power over the board to extract rents from the company through their compensation package. It also describes, and tests mechanisms that explain the occurrence, methods that can be used to obscure the total value of the compensation from the general public in order to prevent public outrage

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to other directors and executives. Given the mixed evidence that is found in studies that aim to explain levels or structure of executive compensation (Devers, Cannella, Reilly, & Yoder, 2007), one could conclude that there must be some other source of influence. This research seeks to show that executives use the power derived from their social networks to influence the level and structure of executive compensation. This study will add to the vast amount of empirical studies in the field of executive compensation. More specifically, it will add to the understanding of the role of social networks in the relationship between boards and executives.

Research questions

This research will seek to answer the question “How can the power derived from social networks be used to extract rents from the employing company?”. Moreover, it will examine whether social networks indeed provide power that enable executives to extract more rents from the company. It also examines whether this power can explain the differing manners in which executive compensation is structured.

Structure

The following section will provide an overview of literature on executive compensation. It will then proceed to outline the underlying assumptions of managerial power approach and the conceptualization of executive power through social network theory. The third section will describe the theoretical model that is the core of this research. The following section translates the theoretical model into a testable format by describing the collected data and the final sample that was used to empirically test the theoretical model. The thesis will then proceed to describe the empirical results of the research. Finally, the conclusions and limitations of the research, as well as recommendations for future research will be discussed.

2. Literature

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The board of directors of large firms serves to represent the shareholders. Their objective is to monitor executives’ performance, and to protect the company from opportunistic behavior by executives that may harm the interest of the firm’s owners. One way to align the executives’ interests with those of the shareholders is through their compensation package.

Agency theory and optimal contracting

The bulk of research into the field of executive compensation concentrates on the theory of optimal contracting (Bebchuk, Fried, & Walker, 2002). This theory argues that contracts are devised to provide executives with contracts that minimize agency costs. It assumes that employers try to find suitable managers, and bargain with them at arm’s length to obtain an agreement that satisfies both parties (Dorff, 2005). Thus, the compensation package must be attractive enough to attract the best executive. In addition, the costs of monitoring the executive’s performance, as well as the residual costs (stemming from the fact that the executive could still develop a policy that deviates from the shareholders’ preferred policy), should be minimized.

Research has indicated many ways to induce CEOs to adopt policies that are in line with shareholders’ interests, the most important one being linking the executives’ financial incentives to their performance (see, for example, Chan, 2008). This can be accomplished by offering executives a bonus when they meet certain performance criteria. This is a direct linkage between pay and performance. As it is the board’s role to set the executives’ compensation, they can construct the goals such that executives obtain a bonus when shareholders’ interests are best served. A commonly used method is to tie bonuses to performance. This can be done through, for example, tying bonuses to profits, or to changes in share price. Murphy (2000) notes that using accounting measures as the target for a bonus could induce an executive to influence these measures. His research shows that firms that use accounting measures as a target show more indications of earnings management.

Yet another method to align management’s incentives with those of shareholders seems obvious. By making executives shareholders themselves, their interests are automatically (more) aligned with those of ‘common’ shareholders. McConnel and Servaes (1990) document evidence that insider ownership increases firm value, although there is a limit to this positive effect. Inside ownership counters the executives’ natural tendency to appropriate the firm’s assets in their own interest, and steers them towards the goals of shareholders. From theory, it is impossible to predict which tendency is strongest, but positive effects do not last beyond inside ownerships exceeding 50 %. At that point, increasing inside ownership does not provide additional protection from hostile takeovers (McConnel & Servaes, 1990). Since it is uncommon for externally hired managers to own that large a fraction of their firms, insider ownership can be considered a good measure to align management’s interests with those of shareholders.

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The structure of the board can also reduce agency costs. Rosenstein and Wyatt (1990) have studied the influence of outside board directors on shareholder wealth. They define an outside director as a person that is not, neither currently nor in the past, employed by the company, and the only connection that the person has with the company are the duties as a director. They conclude that announcements of the appointment of an outside director generally lead to an increase in shareholder wealth. This indicates that shareholders believe that outside directors are better able to protect their interests. This is in line with corporate governance theories that argue that outside directors provide better monitoring of executives, and that they provide management with complementary knowledge.

Some researchers argue that shareholders are not the only agents that are relevant to take into account when managing a firm. Coombs and Gilley (2005), for example, argue that executives should not only focus on shareholders, but, more general, on serving the interest of all stakeholders involved with the company. They reason that executives that adhere to a policy of stakeholder management should receive a higher compensation due to the superior performance of their firm. However, their empirical tests reveal the opposite result: executives that pursue stakeholder management receive a lower compensation than those that focus on financial results.

Other focuses in executive compensation research

Agency theory, and related theories, focus mostly on alignment of the executives’ goals with those of shareholders. As such, this area of research focuses on the structure of executive compensation. It provides arguments for using bonuses and option contracts as part of the compensation package, and if goals are chosen wisely, it predicts the height of these variable components. Other theories are more concerned with the level of executive compensation. Baumol (1967) already mentioned that “executive salaries appear to be far more closely correlated with the scale of operations of the firm than with its profitability”1.

Sanders and Carpenter (1998) argue that executives are compensated for a measure of productivity. Their argument is based on the assumption that the bulk of an executive’s work is based on processing large amounts of information in a complex environment. Not only are executives better at processing such large amounts of information, they must also be compensated for the increased complexity, and risks, that they face. Therefore, the more complexity, stemming from, for example, the size of the firm or the degree of internationalization, the higher the executive’s compensation will be. In a meta-analysis of CEO pay studies, Tosi, Werner, Katz, and Gomez (2000) conclude that approximately 40 % of the variance in executive compensation is explained by firm size.

The screening hypothesis links personal characteristics to salary (see Hogan and McPheters, 1980, for references). As it is very hard to determine whether a person will succeed as an executive only by looking at current performance, the board will take into account a person’s characteristics, such as educational background, age, and experience, to determine whether he will be able to provide good management to the company. Ultimately, these give an indication of the capabilities of the executive, and this will also determine an executive’s compensation. Hogan and McPheters (1980) provide empirical evidence for

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some variables. Specifically, age, tenure, and years as an executive have significant effects on compensation, whereas having an administrative background or graduate experience did not.

Limitations to theories of optimal contracting and other agency theories

The aforementioned mechanisms to reduce agency costs are all methods to align executives’ goals with those of the principals. However, some researchers (such as (Bebchuk, Fried, & Walker)) argue that these methods do not work efficiently. For example, even though most boards have a nomination committee for appointing directors, and the approval of shareholders is needed to appoint a new director, effectively, most new directors are proposed by the CEO himself (Rosenstein & Wyatt, 1990). In addition, as noted by (Devers, Cannella, Reilly, & Yoder, 2007), empirical studies show mixed evidence with regards to drivers of executive compensation as mentioned above.

Several other practices do not coexist very well with the agency theory and optimal contracting. Many of these concern practices surrounding option grants. While in itself, granting options can be a very good measure to align management’s incentives with those of shareholders, by making managers themselves shareholders, and by serving as a bonus that can only be received when a certain goal is attained, some of the attributes that are commonly included in option contracts are puzzling from the optimal contracting view (Bebchuk, Fried, & Walker, 2002). For example, nearly all options are granted at-the-money, i.e. with an exercise price which is equal, or close, to current share price (Lie, 2005). Because on average, market prices for shares increase in the long run, managers are always rewarded, even if the increase in value has nothing to do with their performance, but is just a result from a general market movement. This problem could easily be solved by using options that are tied to, for example, a peer group of companies in the same industry or facing similar risks, that need to be outperformed in order for the options to vest and become exercisable. However, there are few companies that include such a provision in their option contracts (Bebchuk, Fried, & Walker, 2002). In addition, when (general) market prices fall, it is not uncommon to reset the exercise price in option contracts. This effectively removes the incentive from the option contracts, as executives know that when their company’s stock performs poorly, the exercise price may very well be reset to current market price, meaning that they can still make a profit on the option contract (Bebchuk, Fried, & Walker, 2002).

Another practice that is common also does not coexist very well with the concept of the board setting executive compensation in the agents’ best interest is a practice called option backdating. This results in the grant date of the options lying in the past. As the exercise price of the options granted is usually equal to the prevailing price at grant date, this results in possibilities to select more favorable exercise prices. (Lie, 2005) found that abnormal returns on shares are negative in the period prior to awarding stock option grants, and positive in the period afterwards. This suggests that “[…] unless executives possess an

extraordinary ability to forecast the future market wide movements, […] at least some of the awards are timed retroactively” (Lie, 2005).

The managerial power approach

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the executive receives on top of what is needed to persuade him to work in the company and to provide him with the incentives that will make him manage the company in the shareholders’ best interest (Conyon, 2006). This managerial power approach acknowledges the agency problem that exists between shareholders and management, but rather as seeing executive compensation as the solution to the problem, it is viewed as part of the problem itself (Bebchuk, Fried, & Walker, 2002). The ability of executives to extract excessive rents constitutes an agency cost. After all, it is not in the best interest of the shareholders to transfer as much money as possible to the executive.

The managerial power approach rests on the assumption that the executives have considerable power over the board of directors. This power extends even to those directors that are nominally independent (Bebchuk, Fried, & Walker, 2001), i.e. people whose only relation to the company is the fact that they serve on its board. As pointed out by Rosenstein and Wyatt (1990), new directors are commonly proposed by the CEO, which means that he influences the selection of people that are favorable towards him. In addition, once directors are on the board, they will be inclined to agree with the CEO rather than oppose him, because opposing the CEO and not reaching consensus would mean that they should either fire him or step down as a director. To fire the CEO, the director needs to get at least the majority of other directors on his side, which is unlikely to happen over the executive’s compensation, but the alternative, to step down, is also not very attractive to most directors. Often, they would feel stepping down as a director means a loss of reputation for themselves (Bebchuk, Fried, & Walker, 2002).

If the board of directors cannot prevent the CEO to extract excessive rents, then what prevents executives to extract all profits? When the compensation package becomes too extraordinary, shareholders and other members of the general public may become upset and oppose to the compensation package. These ‘outrage costs’ lead to a loss of reputation and credibility for the executives (Conyon, 2006). This will prevent them to ask for ‘outrageous’ compensation packages. In addition, directors will be reluctant to approve of compensation packages that provoke too much outrage, because their reputation can be jeopardized too (Bebchuk, Fried, & Walker, 2002).

To prevent outrage from occurring, CEOs and boards of directors use a technique that Bebchuk, Fried & Walker call camouflage. As long as the magnitude of a compensation package can be justified, legitimized, or obscured from the public, it will not cause outrage. An example of camouflage techniques is the desire of companies to compensate their executives above the industry average, as a justification of the level of remuneration. However, this also leads to ever-increasing amounts of compensation (Bebchuk & Fried, 2005). As a result of the benefits of camouflage, executives, and their boards, prefer compensation structures to be complicated, as this can make it harder for outsiders to recognize that excessive rents are extracted. Another way to obscure the total magnitude of the compensation package is by using option plans. As mentioned before, option plans are not necessarily a bad thing, as they can provide very good incentives to executives, but “the devil is in the details” (Bebchuk, Fried, & Walker, 2002). Research has indicated that executives generally hold too many options, decreasing the marginal benefit of each option2. In addition, some other practices that do not make sense include uniform use of at-the-money

2 As quoted by Bebchuk et. al., 2002. Full reference: Michael A. Habib and Alexander P. Ljungqvist, 2002. Firm value

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options, reload options, and the freedom for executives to unwind incentives by selling and/or hedging options and shares (Bebchuk, Fried, & Walker, 2002).

Thus, the managerial power approach addresses a number of limitations to agency theory. By using their power in the bargaining process with the board, executives can extract excessive rents, or outrageous compensation, from the company. These excessive rents can be defined as the surplus that is being paid to executives in excess of what would be necessary to get the executive to work for the firm (Conyon, 2006). This constitutes an agency cost that the board is supposed to prevent.

CEO power and social network theories

The power of CEOs can stem from many sources. One source of power for CEOs lies in CEO duality, a situation in which one person is CEO as well as chairman of the board. Finkelstein and D’Aveni (1994) argue that this situation leads to increased power for the CEO for several reasons: as chairman of the board, the CEO is responsible for organizing meetings as well as setting the agenda of these meetings; and as chairman the CEO has additional influence over nomination of new directors.

Another factor that increases the executives’ power over the board of directors is tenure. Van Essen, Otten, & Carberry (2012) argue that executives that have retained their position for a longer period of time have more experience with the company and can therefore exert more influence over the board. Larger boards provide the executives with more power over the compensation-setting process due to the increased complexity of social dynamics within such groups (Yermack, 1996). Finally, much discussion is centered on the independence of the board of directors, such as Rosenstein & Wyatt (1990) who argue that outside directors are believed to be better able to protect shareholders’ interests. Therefore, the higher the percentage of independent directors, the less power the executives will have over their board. Note that the managerial power approach argues that even directors that are nominally independent, can be influenced by the executives, for example as familiarity increases as executives and directors work together for a prolonged period of time (Essen, Otten, & Carberry, 2012). This resembles what is called the old boys’ network in the popular press; a term that reflects the sentiment that the world is governed by a group of people that allocate jobs amongst themselves. Or, as one website puts it: “They sit on the

largest boards of the country. Many sit on government committees. They make decisions that affect our lives. They rule.”3 This argument is formalized in the theories of social network.

Sociologists have long argued that, in addition to human capital, there is such a thing as social capital. The fact that some people do better than others is often thought to be the result of better qualifications and ability (i.e. human capital), but Burt (2000) argues that this phenomenon does not explain all variation. Rather, Burt says, “the individuals who do better are somehow better connected”. They can reap the benefits of their network by having access to information at the right time. Burt’s argument is formalized in the following paragraph.

People (actors in sociology terms) are generally grouped in clusters; these are composed of actors that frequently interact with each other. Actors within the same cluster tend to know about the same things around the same time (Burt, 1997), while actors in other clusters learn about these things later. Generally,

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these people are not unaware of each other’s existence, but they are busy doing their own things, such that they do not have sufficient time to monitor the activities in the other cluster (Burt, 1997).

Thus, each cluster has its own flow of information. One cluster is unaware of the information flowing in the other cluster as long as there are no connections between the two clusters. The absence of connections between two clusters is called a structural hole (Burt, 1992). A person that happens to bridge this structural hole can direct the information that flows from one cluster to another. Blyler and Coff (2003) argue that these people will have more bargaining power that they can use to appropriate rent from an organization to themselves. This bargaining power originates in the fact that the broker (the person that spans the structural hole) can outplay individual demands against each other (Burt, 2000). In addition, they control who obtains which information, and when.

The network can constrain a broker’s opportunities for brokerage to the extent that the network is concentrated, directly or indirectly, in a single contact. Several characteristics of a network can influence a person’s social capital. These characteristics are size, density, and hierarchy of the network (Burt, 1997). A larger network provides the person with more bits of information that can be used to broker between individuals’ demands (Burt, 2000), and therefore increases social capital. Dense networks provide less social capital, because there are less structural holes and therefore fewer opportunities to broker between individuals (Burt, 2000). There are so many ties amongst the actors that the individual actors do not have unique connections. The third characteristic refers to the extent to which a network is concentrated in a single contact. When the network is more hierarchical, it provides less social capital, because the central contact in the person’s network can obtain the same information from others (Burt, 2000). This is caused by the fact that hierarchical networks are concentrated around a single dominant person (Burt, 1997). In the event of a highly hierarchical network, a single tie with the dominant person would provide the same information flow as investing in ties with all individuals in the network.

All three characteristics are summarized in a measure called network constraint. This is an index measure that is based on the extent to which a person’s network is invested in a single contact, j:

2 qj iq q ij ij p p p c , where p

ij is the proportion of i’s relations that is invested in person j, and the

sum term is the proportion of other contacts’ relations that are invested in person j (i.e. the indirect investment of i in j). This measure therefore specifies the (in)direct effort that is invested in a particular person. In case the CEO would invest all his time in a single contact, the measure would be one. This would result in a network consisting of only one tie (Burt, 1997). As such, this measure also gives an indication of the dispersion of the person’s network. The larger the network, the smaller will be the amount of time invested in a single contact.

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As this research is focused on executive compensation the relationship between executives and the board of directors is crucial. Translating Burt’s concept to this setting leads to the following observations. Within a single board of directors, there are no structural holes as all directors have ties to each other. This also means that each person invests in each other person directly as well as indirectly, and this constraint measure (cij) is equal for each of the individuals on the board. The constraint index becomes interesting when there are ties to other boards, when a person sits on two boards simultaneously. Assuming that an individual is the only person that sits on both boards, this person is bridging a structural hole and can therefore use the increased informational gap to his advantage. The individual sitting on two boards benefits from the increased size of his network, as this offers more opportunities to broker information. In the context of executives and their boards, a more hierarchical network would be reflected by all directors in a network being linked to one executive, with no ties among themselves. As such, the individual being the only person to sit on two boards, also increases the hierarchy of the network of the other persons.

More constraint indicates less structural holes, and thus, less social capital. In other words, the less constrained an executive is, the more bargaining power he will have. This bargaining power stems from the fact that these executives have access to more information and that they control who benefits from this information (Burt, 1997). Executives can use this information to increase the informational asymmetry between themselves and the board of directors, in their role of the principals’ representatives. They can then use this advantage to exert power over the compensation-setting process, in order to extract excessive rents from the company. Alternatively, they could negotiate compensation structures that obscure the total value of the compensation company from the public, in order to prevent the public to conclude that excessive rents are being extracted from the company.

A graphic depiction of such a network is included in Figure 1. The individual of interest, denoted by the red dot, sits on the board of three companies. This can be seen from the green dots that represent the executive’s direct contacts; these are clustered in three groups. Two of these direct contacts are on the board of two companies of which the executive is a member. As such, the executive is not the only one to span the hole between the companies. However, the executive is the only one sitting on all three boards. Therefore, the executive can gain advantage by determining the flow of information among the three boards. The blue dots in the figure are the executive’s second degree contacts, the ones that his network provide access to.

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to broker this information amongst agents. This power can be used in the negotiation process in which executive compensation is set, to extract excessive rents from the company.

Figure 1: Example of network

Research hypotheses

The social network theory provides a measure of power, however, this is a proxy as power cannot be quantified. The theory indicates that people with less constraint should be able to benefit from the access to information originating in different clusters. This power can be used in the bargaining process between the board and the executive, as well. By having access to more information, less constrained executives will be able to negotiate more favorable compensation packages.

Executives can use this power to influence both the total dollar value of their compensation package, as well as the structure of the compensation package. Following the managerial power approach, executives will wish to increase the total level of compensation in order to maximize their personal wealth; thereby extracting excessive rents from the company (Bebchuk, Fried, & Walker, 2002). Because it is not possible to measure the minimum compensation that is needed to attract and retain an executive, I assume that a higher dollar value of compensation indicates more rent extraction.

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Once the compensation reaches a sufficiently high level, executives will wish to camouflage the total value of their compensation by adding long-term compensation forms in order to prevent public outrage (Bebchuk, Fried, & Walker, 2001). The managerial power approach predicts that long term compensation forms, such as options, will be used to camouflage the level of compensation. These camouflage techniques are most important when the executive has been able to extract sufficient rents to induce outrage by the public. The board of directors will be more inclined to improve of a compensation package when this outrage can be prevented. Therefore, it is likely that executives that hold the power to obtain an exorbitant compensation package will resort to option plans to camouflage the dollar value of their compensation. By using option plans rather than dollar-value bonuses, the executive can impede the public’s ability to assess the size of the compensation package. By preventing public outrage, they are able to secure their compensation.

Hypothesis 2: The less constrained an executive is, the more likely it is that variable compensation is paid in options.

Finally, the manner in which the option contracts are structured provide an insight into whether the option contracts were granted to camouflage excessive rents. One of the features of option contracts that can indicate camouflage is granting options that are closer to the money at grant date (Bebchuk, Fried, & Walker, 2001). Therefore, executives that are in the position to extract excessive rents are more likely to be granted options of which the strike price is close to the share price prevailing at grant date.

Hypothesis 3: The less constrained an executive is, the smaller the gap between strike price and the prevailing price at grant date.

The following section will provide a theoretical model that can be used to test the validity of these hypotheses.

3. Theoretical model

In this section, I will outline a theoretical model that is appropriate to address the research hypotheses that were identified in the previous section. Apart from the variables of interest, the control variables will also be defined, resulting in a testable mathematical expression. A description of the dataset is provided in the section Data and methods.

As outlined in the prior section, the managerial power approach describes how executives can influence their compensation by exerting power over those responsible for setting the compensation. Social network theory describes how the structure of a person’s network can increase this person’s power by providing the person with influence over the information flow between people. The structure of a person’s network can be measured by a measure called network constraint index (as discussed in the section CEO power and social network theories). Social constraint is expected to have a negative correlation to the height of the executive’s compensation.

(1.1) = , where

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In order to properly assess the influence of network constraint, the influence of other factors on executive compensation needs to be taken into account. The factors that are most commonly cited as being a determinant of executive compensation, are firm size, firm performance, and personal characteristics of the executive, therefore, these variables will be included in the theoretical model.

(1.2) + , where

EC = executive compensation C = network constraint FP = firm performance FS = firm size

PC = personal characteristics, defined as sex, age, and tenure

As discussed before, executives’ compensation can be used to provide executives with incentives that make them pursue the owners’ interests. It is believed that shareholders’ main objective is to increase share price. Therefore, I expect the executive to be rewarded for increases in share price.

While the firm performance is a measure that ordinarily affects variable forms of pay, such as bonuses, firm size and personal characteristics are more likely to affect the base component of executive compensation. Firm size is expected to have a positive correlation with executive compensation, as the executives will be rewarded for the increased complexity of the firm they are managing (Sanders & Carpenter, 1998). Hogan and McPheters (1980) have found that personal characteristics have a significant influence on executive compensation. Specifically, age is expected to have a positive correlation, due to experience, whereas tenure is expected to have a negative correlation to executive compensation, mostly due to better bargaining positions of externally hired executives. Male executives, finally, are expected to earn more due to their better negotiation skills.

The next section will proceed to describe the dataset that was used to analyze the above model.

4. Data and methods

The data that were used in to analyze the proposed model of executive compensation were collected in a data project initiated by the University of Groningen. The data collection project was based upon a website called Theyrule4; which provides a tool to analyze the connections between the most influential

people in the United States: those that sit on the boards of the largest companies and participate in government organizations. By joining the efforts of several students, a dataset comprising all companies in the Fortune 500 as per 2005, supplemented by a number of companies that were included in the S&P 500, was created. The dataset consists of two levels of information, on the company level and on the level of the directors of the company. The company-level set includes data on each of the companies in the sample, including data such as industry, stock price, firm size, and sales. The director-level set includes data on each of the directors in the company, including data such as age, tenure, membership of audit and / or compensation committee, compensation, etc. All data were collected for the years 2003 and

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2004, and with the majority of the data having been retrieved from SEC filings (through EDGAR filings5),

the Theyrule website, and S&P databases.

Definition of each of the variables

This section will provide a definition of each of the variables to be included in the data analysis, based upon the literature review and the theoretical model described in previous sections.

Executive compensation: Executive compensation consists of four components: base salary, bonus,

options, and other compensation. The base salary is defined as the total fixed compensation paid during the year, measured in dollars. The bonus is defined as the total variable compensation paid during the year, measured in dollars. The options are measured by retrieving the potential realizable value / grant date value as reported in the proxy statements as filed by the company. In the event that the option value is represented by potential realizable value, the potential value using the 5 % stock appreciation term was used. The other compensation, finally, consists of all other forms of compensation, measured in dollars. This includes forms of compensation such as relocation compensation or pension plans.

Constraint index: The constraint index is calculated using the network data analysis tool Ucinet. This tool

is based upon the social network theories advocated by Burt (see for example Burt R.S. (2000)), and takes network matrices as its input. Such a matrix is an overview of the ties between persons in a network. For purposes of this study, a network is defined as all people a person sits on a board with, regardless of their roles. The constraint index serves as a proxy for power and has an inverse relationship to power. As such, less constraint indicates more power.

Firm performance: Firm performance is measured as the change between the stock price ultimo 2003 and

ultimo 2004 in percentage points.

Firm size: Firm size is measured as total sales in millions of dollars.

Personal characteristics: Sex will be measured using a dummy variable, distinguishing between male (1)

and female (0). Age will be computed from the year of birth, taking 2004 as the year of reference. Tenure will be computed as the difference between the year of appointment and 2004.

Final sample

The dataset that was collected through the university project consisted of 544 firms with a total of 6,094 individuals holding one or more positions on the boards of those firms. As a result of missing data, some observations were dismissed from the final data set. These exclusions will be discussed below.

Network constraint was calculated using all observations, including those that were later dismissed. This was done because networks were defined narrowly to begin with; as the only individuals that are included are people with whom a person sits on a board. Other individuals that may be relevant to a person’s network, such as university friends or sports buddies, are not taken into account.

To calculate network constraint, the data were arranged in a manner that links each individual to all other individuals with whom they sit on a board. This file was then analyzed using Ucinet software. The

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software calculated constraint measures, taking into account the individuals’ ties to other individuals, and the ties of their ties. In other words, an individual’s network includes his connections, and his connections’ connections.

In calculating network constraint, the ties between connections were unweighted, meaning that the same value was assigned to each tie regardless of the position of an individual on the board. This was done because we have no information available from which we could draw conclusions regarding the frequency of interaction, for example. However, if two individuals share more than one board, each additional tie adds weight to the relationship. If, for example, two individuals sit on three boards together, their tie will have a value of three, whereas their tie would have a value of one if they only sat together on one board. After calculating the network constraint, the dataset was reviewed in order to filter it from any incomplete observations. First of all, the relevant individuals were filtered as the starting point to determine whether the observation was complete. Because this research aims to explain executive compensation, non-executive directors were excluded as observations. This results in a sample size of 902 individuals. An overview of the sample split by position is provided in Table 1.

Description Nr of observations

Chief executive officer 592 Chief financial officer 310

Executives 902

Other insiders 1,461

Outsiders 5,046

Undetermined 32

Total observations 7,441

Table 1: Sample by position

Subsequently, I deleted all individuals that changed position during the sampling period (i.e. 2003 and 2004), as this could distort the data due to compensation periods of less than a year, hiring bonuses, and compensation for termination of employment. Finally, I verified whether all data needed for the analyses to be performed were present. All observations for which information was incomplete, were deleted from the sample. Missing information included items such as birth dates, option values, and firm information. A summary of reasons of deletion is included in Table 2.

Reason # of deletions

Changed position during sampling period 14 Missing date of birth or date hired 75

Incomplete option data 15

Incomplete compensation data 10

Incomplete firm data 40

Total deletions 154

Table 2: Deletions

Taking into account the above described deletions, the final sample consists of 748 executives for which data is complete.

Statistical methods

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(2.1) , where

C = network constraint

FP = firm performance, measured as change in stock price between 2003 and 2004 FS = firm size, measured as total sales in millions of dollars

S = sex, defined as 1 = male, 0 = female

A = age in years, computed using the year of birth and 2004 as the year of reference T = tenure, defined as the number of years between first appointment and 2004 For each of the hypotheses that will be tested, y will take on a different meaning.

Hypothesis 1 is concerned with total compensation. In this model, y = total dollar value of the compensation package. This includes base salary, variable compensation, and option plans granted.

Hypothesis 2 is concerned with the probability that options are used in the variable component of the total compensation package. In this model, y represents a choice variable that can take the values 1 (options are used) or 0 (options are not used).

Hypothesis 3 is concerned with the properties of the option contracts. In this model, y = market price of the share at the closing of the financial year -/- exercise price of the option.

Hypotheses 1 and 3 can be estimated using an ordinary least squares regression. The second hypothesis is concerned with a choice variable: the variable component of compensation either includes options, or it does not. Therefore, for individual observations, the dependent variable y takes the value of 1 or 0. For the total population, the dependent variable y represents the probability that the variable component of compensation contains options. When estimating an ordinary least squares regression, y can assume values outside the expected range, below 0 or exceeding 1, as ordinary least squares regression assumes constant influence of the explanatory variables on the dependent variable y. The Logit model overcomes this problem by assuming an S-shaped relationship between the dependent variable and its explanatory variables.

5. Empirical results

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Table 3: Descriptives

The summary statistics for the sample are included in Table 3. From this table, it can be observed that of the 749 observed executives, 654 received a bonus during 2004. The bonus ranges from $ 3,000 to $ 17.2 million. 441 executives received some form of irregular compensation. Finally, 555 executives received option grants. The average firm performance improved by almost 15 percentage points, but there were 223 firms that had a negative performance, measured as the increase in stock price.

Appropriateness of regression analysis

To test whether none of the assumptions relating to regression analysis are violated, I have used SPSS to calculate several diagnostics.

Figure 2: Scatterplot of standardized residuals and standardized predicted value

N Minimum Maximum Mean Standard

deviation Age 749 35 84 55 7.11 Tenure 749 1- 55 8 7.86 Constraint 749 0.06 0.50 0.24 0.09 Total compensation 1 749 1 56,532,552 5,475,578 6,261,433 Salary 2 749 - 4,973,073 822,999 445,845 Bonus 2 654 3,000 17,273,290 1,695,155 2,018,952 Irregular 2 441 90 6,869,842 228,435 511,287 Options 2, 3 555 16 48,563,243 4,099,839 5,404,342 Firm performance 4 749 52- 1,019 15 61 Firm size 5 748 1 7,392,113 25,878 277,934

1: measured as the sum of Salary, Bonus, Irregular, and Options 2: as disclosed in the 2004 financial reports

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To determine whether the data are heteroskedastic, I have plotted the residuals against the expected values of the regression analysis, refer to Figure 2. Since there is no pattern, in the sense that residuals increase as the predicted value increases or similar, I conclude that heteroskedasticity is not present. In order to test for presence of serial autocorrelation, SPSS calculates the Durbin-Watson statistic. From Table 4, it can be seen that this statistic is 1.967, close to 2, therefore the conclusion can be drawn that autocorrelation is not present.

Table 4: Model summary

Finally, I have examined correlations between the variables included in the model to determine whether the variables are related to each other. In Table 5 the correlations between each of the variables are displayed. Most correlations are between -0.2 and + 0.2, indicating little correlation between the variables. The variables Age and Tenure show a higher correlation, which is not surprising as both are dependent on the year of birth. However, correlation is less than 0.5, as such, this correlation does not affect the predictability of the variables.

Table 5: Correlations

The analysis of appropriateness as presented above was made for the dataset used to analyze Hypothesis 1, regarding the relation between social constraint and total compensation. The datasets for the other two hypotheses were analyzed in a similar manner.

Hypothesis 1: social constraint and the total compensation value

The first hypothesis is concerned with the relationship between social constraint and total compensation in dollars. To control for other factors that influence total compensation, control variables were added to filter for their influence on the total compensation and to isolate the influence of social constraint. Table 6 presents the outcome of this regression analysis. When examining the signs of the coefficients, it can be seen that all signs except firm performance are in the expected direction. Constraint and gender have a negative correlation to total compensation, which is expected based upon the analysis of theory presented in section two. The more constrained executives have a lower total compensation package, measured in dollars. This also holds for the females in the sample. Age and tenure both have a positive effect on total compensation, which is in line with observations that people earn more as they age. Larger

R R square

Standard error

of estimate Durbin-Watson

0.19 0.04 6,177,160 1.97 a, b

a: Predictors: Constraint, Firm size, Fiirm performance, Gender, Age, Tenure b: Dependent variable: Total compensation

Pearson correlation Total

compensation Constraint Firm size

Firm

performance Gender Age Tenure

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firms also indicate more compensation. I expected firm performance, finally, to have a positive impact on total compensation, as the executive is to be compensated for his efforts to improve firm performance. However, in Table 6, it can be seen that firm performance has a negative impact on total compensation. This impact is highly insignificant, with a p-value of 0.876, therefore I will not discuss this unexpected outcome further. As can be seen from the output table, only two variables have a significant influence on total compensation, being social constraint and tenure.

Table 6: Coefficients regression H1

From Table 7, it can be seen that the model as estimated explains 2.7 % of the variance in total compensation. This indicates a low explanatory power of the model. This may be caused by omitted variables that explain part of the variance that was not explained by the social constraint measure. It may also be caused by having used inaccurate proxies as input variables. These limitations will be discussed in more detail in section 6.

Table 7: Model summary H1

From Table 6, it can be concluded that constraint and tenure are the two significant variables influencing total compensation. The remaining variables add to the model’s explanatory ability but are not of significant influence. When estimating the model using only the significant variables, the model’s explanatory power increases slightly to 2.8 %. From this observation I conclude that the variables that were regressed insignificant do have an impact on total compensation, but they were possibly not modeled correctly. Perhaps they have a non-linear effect or they may be related to each other. The significance of the variables constraint and tenure increases and effects become more pronounced.

Hypothesis 2: social constraint and the presence of option contracts

In the second hypothesis, I am concerned with the question whether less social constraint, indicating more power, makes it more likely that options are being used as part of the total compensation package.

Standardized coefficients B

Standard

error Beta t Sig.

Constant 3,793,288 2,095,629 1.810 0.071 Constraint 7,831,572- 2,679,697 -0.107 -2.923 0.004 Firm performance 582,156- 3,734 -0.006 -0.156 0.876 Firm size 1 1 0.026 0.706 0.480 Gender 708,228- 1,120,764 -0.023 -0.663 0.528 Age 54,238 36,444 0.062 1.488 0.137 Tenure 76,506 32,706 0.096 2.339 0.020

Dependent variable: Total compensation

Unstandardized coefficients R R square Adjusted R square Standard error of estimate Durbin-Watson 0.187 0.035 0.027 6,177,160 1.972a, b

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From Table 3, it can be read that out of the 748 executives, 556 persons received option grants as part of their compensation package. The average value of such a grant was $ 4,092,465.

Table 8: Model summary H2

I have used logistic regression analysis to determine whether social constraint is a predictor of the use of option contracts as part of executive compensation. From Table 8, I conclude that the estimated model does not predict the use of options very well. The explanatory power of the model is 3.7 %. In the classification table in Table 9, it is shown that of the 748 observations, the model predicted 745 observations correctly.

Table 9: Classification table H2

When examining the coefficients in Table 10, it can be concluded that only two variables, Firm performance and Age, are of significant influence on the probability that options are used as part of the compensation plan. When examining the coefficients for social constraint, it can be concluded that although the sign for constraint is negative as would be expected, its p-value is 0.146. As such, it is not significant enough to conclude that social constraint is a determinant of using options as part of executive compensation.

Table 10: Coefficients H2

Hypothesis 3: social constraint and option contract features

The third hypothesis is concerned with one of the characteristics of options: their exercise price. According to Bebchuk et. al. (2002), one of the details that does not make sense in terms of using option contracts to align executives’ interest with those of shareholders, is the granting of options with exercise prices close to the current market price. To test whether executives can use their social capital to negotiate better option contracts, I have estimated a regression using the difference between market price prevailing at the grant date, and the option’s exercise price as a dependent variable. As options may

-2 Log likelihood

Cox & Snell R square Nagelkerke R square 833.112 0.025 0.037 Observed 0 1 Options granted? 0 3 189 1.6% 1 0 556 100.0% Overall percentage 74.7% Percentage correct Predicted Options granted?

B Standard error Wald

Degrees of

freedom Significance Expected B

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be granted throughout the year, I have used the prevailing share price at year end as a proxy for the price at grant date. A positive number, in this respect, would imply that the strike price is below the market price and, as such, that the options were granted in the money. The main explanatory variable of interest is social constraint, which is expected to have a negative impact on the difference between strike price and market price. The other variables remain as control variables. Table 11 shows a summary of the dataset. Note that the dataset has been reduced to 556 observations as only the executives that were granted options have been taken into account.

Table 11: Descriptives

The mean difference between strike and market price is positive, indicating that the majority of the option grants are made so at ‘in the money’ levels. This is an extraordinary observation given the fact that even if shareholders’ value would not improve (assuming that this is the objective of the shareholders and, as such, the executive’s task), the executive would benefit from the option grant. As such, it resembles more closely a general compensation component rather than a compensation component used to align the executive’s interest with those of shareholders. This can be interpreted as a camouflage technique, used to obscure the magnitude of the compensation package to the public (Bebchuk, Fried, & Walker, 2002).

Table 12: Coefficients H3

Examining scatter plots of residuals and correlations between variables do not indicate violations of the assumptions to regression, therefore a linear regression model is appropriate. In Table 12, it can be seen that Constraint and Firm performance are the only variables that have a significant impact on the dependent variable, although the magnitude of the effect of firm performance is limited. As can be read from Table 12, constraint has a negative impact on the difference between strike and market price, as was expected. It can be concluded that the less constrained the executive is, the more likely it is that options are granted at favorable prices. This can then be considered an indication of the notion brought forward

N Minimum Maximum Mean

Standard deviation Strike vs. Market 556 51.66- 81.66 4.20 10.62 Constraint 556 0.07 0.50 0.23 0.08 Firm size 556 1 7,392,113 30,935 321,943 Firm performance 556 52.00- 235.00 11.37 27.80 Age 556 36.00 80.00 54.15 6.81 Tenure 556 1.00 55.00 7.61 7.48 Standardized coefficients B Standard

error Beta t Sig.

Constant 8.582 3.789 2.265 0.024 Constraint 10.332- 4.820 0.088- 2.143- 0.033 Firm performance 0.170 0.015 0.445 11.677 -Firm size 0.000 - 0.001 0.018 0.985 Gender 0.239- 1.921 0.005- 0.125- 0.901 Age 0.067- 0.067 0.043- 1.010- 0.313 Tenure 0.032- 0.061 0.022- 0.522- 0.602

Dependent variable: Strike vs market

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by Bebchuck et. al. (2002) that executives with more power use options to camouflage the outrageousness of their compensation package.

From Table 13, it can be concluded that this model has a higher explanatory power than the ones for Hypotheses 1 and 2. When regressing using only the significant variables Constraint and Firm performance, overall significance increases slightly, from 20.1 % to 20.4 %. As such, I conclude that the insignificant variables, just as with Hypothesis 1, do have an impact on the dependent variable, but they have perhaps not been modeled correctly.

Table 13: Model summary H3

Alternative measures for power

In the literature section, the theory around social networks and constraint was discussed and accepted as a proxy for power. Earlier literature has focused on other measures to determine the independence of the board of directors, where an independent board supposedly curbs the executives’ power. One measure to determine the independency of the board is the percentage of outside directors, defined as being directors that have no connection to the firm other than their directorship (Rosenstein & Wyatt, 1990). In order to determine whether constraint does a better job of explaining variance in total compensation than the percentage of outside directors, I have performed a regression analysis using the percentage of outside directors as the explanatory variable to address Hypothesis 1.

Table 14: Coefficients H1 using percentage of outside directors as proxy for power

As can be seen from Table 14, the percentage of outsiders, and Tenure, are the only two variables with a significant influence on Total compensation. However, I would expect the influence of outsiders on total compensation to be negative, which is the opposite of the found effect. Other variables, except Firm performance, are insignificant but in the expected direction. Firm performance is highly insignificant but the sign is in the opposite direction of what would be expected.

R R square Adjusted R square Standard error of estimate 0.458 0.210 0.201 9.493 a, b a: Predictors: Constraint, Firm size, Fiirm performance, Gender, Age, Tenure b: Dependent variable: Total compensation

Standardized coefficients

B Standard error Beta t Sig.

Constant 1,948,725- 2,243,243 0.869- 0.385 Outsiders 5,379,342 2,088,885 0.094 2.575 0.010 Firm performance 886- 9,785 0.009- 0.234- 0.815 Firm size 1 1 0.026 0.706 0.481 Gender 716,972- 1,142,739 0.023- 0.627- 0.531 Age 60,033 36,450 0.068 1.647 0.100 Tenure 77,747 32,906 0.098 2.363 0.018

Dependent variable: Total compensation

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6. Conclusions

The research question as set out in the introduction of this thesis was “How can the power derived from social networks be used to extract rents from the employing company?”. This was subsequently split into three hypotheses:

Hypothesis 1: The less constrained an executive is, the larger the total dollar value of his compensation package will be.

Hypothesis 2: The less constrained an executive is, the more likely it is that variable compensation is paid in options.

Hypothesis 3: The less constrained an executive is, the smaller the gap between strike price and the prevailing price at grant date.

Using a sample of 6,094 directors, sitting on the boards of 544 firms, I started the empirical evaluation of these questions by calculating measures of social constraint. I then reviewed the sample’s data and deleted all observations that were incomplete or otherwise not valid for the analysis. The final sample of executives that was analyzed consisted of 748 executives.

In the first hypothesis, I argued that executives with more social capital, indicated by less social constraint, will be able to extract more excessive rents from their companies. Because it is impossible to estimate excessive rents, I used total compensation as a proxy for excessive rent, reasoning that, on average, a higher level of total compensation is an indication of more excessive rents. The results of the regression show a significant negative effect of constraint on total compensation, which is in line with the proposed theory.

In the second hypothesis, I argued that, assuming that executives wish to prevent public outrage over the height of their compensation package, they will wish to conceal the total value by using option contracts, as the value of this type of compensation is harder to assess by the general public. Even though all executives would prefer to camouflage the height of their compensation package, executives that have succeeded to extract more rents will have more incentive to camouflage the height of their compensation package. As such, it is expected to be more likely that executives that are less constrained negotiate option contracts as part of their compensation package. The regression results show the expected sign for the impact of constraint on the use of option contracts, but the effect was found to be insignificant. One of the reasons of this insignificant result may be caused by the fact that option contracts also serve as a means to align executives’ goals with those of shareholders (Devers, Cannella, Reilly, & Yoder, 2007), and, thus, option contracts can be granted as part of executive compensation for other reasons than camouflage alone.

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For the first and third hypothesis, the regression analyses showed a significant effect of social constraint. As such, I conclude that the sample provides support for the managerial power approach as advocated by Bebchuk et. al. (2002). Specifically, the analyses’ outcomes indicate that social constraint is an appropriate way to measure power in this context. Unfortunately, the regression results for hypothesis 2 showed no significant effect of social constraint on the use of option contracts as part of executive compensation. With regards to the regression analyses I also want to draw attention to the limited explanatory power that the models were found to exhibit, reflected in low levels of R2. This indicates that

there may have been variables of influence that were omitted in this research.

A related problem is the insignificance of variables that were found to be of significant influence in other studies, such as firm size, age, and gender. This may be caused by having chosen imprecise proxies for the underlying variables. For example, for firm performance, I used the change in share price as a proxy for change in firm performance. Another appropriate proxy could have been the growth in earnings or profits. The limited significance of variables may also have been caused by incorrect modeling. For example, effects are assumed to be linear, as I used a linear regression model, but possibly the effects are curved.

Limitations

As mentioned in the previous paragraph, one of the limitations of this research seems to be that there were variables that were omitted, as concluded from the limited explanatory power of the regressed models.

A major limitation is the definition of social network that was used in this research, being all the individuals that an executive sits on a board with. Intuitively, one could argue that the network that is used to benefit from businesswise is much larger than that, and contains, for example, former university friends, ex-colleagues, and even such non-business like people such as family. This definition is a difficult one to decide upon, especially when considering availability of data. For this type of data to be meaningful, quantity of persons included in the sample is important. However, to obtain the most reliable data, it would be most convenient to interview people directly, which is highly time-consuming for large samples. As such, a careful balance is to be sought for when deciding on the definition of social network. Another major limitation lies in the definition of total compensation. The managerial power approach is concerned with excessive rents. As discussed in section two, excessive rents consist of compensation received by the executive exceeding the minimum required to convince the executive to work for the company (Bebchuk, Fried, & Walker, 2001). As such, in order to determine whether excessive rent extraction has occurred, it is necessary to determine what the minimum required amount would be for the specific person to concur to work for the specific company. As these data are obviously not freely available, I have used total compensation as a proxy for excessive rent, thereby assuming that a higher total compensation indicates a higher rent extraction. This assumption, although convenient, is unlikely to hold true, as there may be other factors, such as prestige, involved when deciding to accept a job.

Suggestions for future research

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types of connections. One way to retrieve these data could be through LinkedIn. An alternative method would be to conduct interviews with the individuals included in the sample.

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7. Bibliography

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corporate finance , 17 (4): 8 - 23.

Bebchuk, L. A., Fried, J. M., & Walker, D. I. (2001). Executive compensation in America: optimal contracting or extraction of rents? The Berkeley law & economics working papers , Article 10.

Bebchuk, L. A., Fried, J. M., & Walker, D. I. (2002). Managerial power and rent extraction in the design of executive compensation. The University of Chicago Law Review , 69: 751 - 846.

Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New York: Macmillan. Blyler, M., & Coff, R. W. (2003). Dynamic capabilities, social capital, and rent appropriation: ties that split pies. Strategic management journal , 24: 677 - 686.

Borgatti, S. P., Everett, M. G., & Freeman, L. C. (2002). Ucinet for Windows: Software for social network

analysis. Harvard, MA: Analytic Technologies.

Burt, R. S. (1992). Structural holes. Cambridge, MA: Harvard University Press.

Burt, R. S. (1997). The contingent value of social capital. Administrative science quarterly , 42: 339 - 365. Burt, R. S. (2000). The network structure of socail capital. In R. I. Sutton, & B. M. Staw, Research in

organizational behavior (Vol. 22). Greenwich CT: JAI Press.

Chan, M. (2008). Executive compensation. Business and society review , 113 (1): 129 - 161.

Ciscel, D. H. (1974). Determinants of executive compensation. Southern economic journal , 40 (4): 613 - 617.

Conyon, M. J. (2006). Executive compensation and incentives. Academy of management perspectives , 20 (1): 25 - 44.

Coombs, J. E., & Gilley, K. M. (2005). Stakeholder management as a predictor of CEO compensation: main effects and interaction with financial performance. Strategic management journal , 26: 827 - 840.

Devers, C. E., Cannella, A. A., Reilly, G. P., & Yoder, M. E. (2007). Executive compensation: A multidisciplinary review of recent developments. Journal of management , 33: 1016.

Dorff, M. B. (2005). Does one hand wash the other? Testing the managerial power and optimal contracting theories of exectuive compensation. The journal of corporation law , 30 (2): 255 - 308.

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Finkelstein, S., & D'Aveni, R. A. (1994). CEO duality as double-edged sword - How boards of directors balance entrenchment avoidance and unity of command. Academy of management journal , 37, 1079 - 1108.

Hill, R., Griffiths, W. E., & Judge, G. G. (1997). Undergraduate econometrics. Hoboken: John Wiley & Sons, Inc.

Hogan, T. D., & McPheters, L. R. (1980). Executive compensation: performance versus personal characteristics. Southern economic journal , 46 (4): 1060 - 1068.

Lie, E. (2005). On the timing of CEO stock option awards. Management science , 51 (5), 802 - 812.

McConnel, J. J., & Servaes, H. (1990). Additional evidence on equity ownership and corporate value.

Journal of financial economics , 27: 595 - 612.

Murphy, K. (2000). Performance standars in incentive contracts. Journal of accounting & economics , 30 (3), 283 - 309.

Rosenstein, S., & Wyatt, J. G. (1990). Outside directors, board independence, and shareholder wealth.

Journal of financial economics , 26: 175 - 191.

Salvaj, E., & Ferraro, F. (2006). CEO constraint and the dark side of social capital. Best paper proceedings in

the corporate governance track at the European Academy of Management (EURAM) annual conference.

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Sanders, W. G., & Carpenter, M. A. (1998). Internationalization and firm governance: the roles of CEO compensation, top team composition, and board structure. Academy of management journal , 41 (2): 158 - 178.

Tosi, H. L., Werner, S., Katz, J. P., & Gomez-Mejia, L. R. (2000). How much does performance matter? A meta-analysis of CEO pay studies. Journal of management , 26 (2), 301 - 339.

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