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management
ISSN 1397-4831

WORKING PAPER 03-12

Tor Eriksson

The Managerial Power Impact on
Compensation
- Some Further Evidence

Department of Economics
Aarhus School of Business

THE MANAGERIAL POWER IMPACT ON COMPENSATION –
SOME FURTHER EVIDENCE*

Tor Eriksson
Aarhus School of Business, Department of Economics, and Center for Corporate Performance

JEL Codes: M50, M52, J31
Keywords: Managerial power, Managerial compensation

* I am grateful to Dansk Management Forum for providing me the data used in the paper, to the
Danish Social Science Research Council for financial support, and to Jingkun Li for useful research assistance. An earlier version of the paper was presented at the 2002 Academy of
International Business Conference in Shanghai, in July 2002. Morten Bennedsen’s and Paul
Bingley’s comments on an earlier version are much appreciated.

2

1 Introduction
The principal idea of this paper is the following: there is some research, predominantly in the field of management research, suggesting that power (which has been defined in alternative ways) generates higher income to managers. However, the tests performed in many of the previous studies (see e.g., Finkelstein and Hambrick (1989), (1996), Lambert, Larcker and Weigelt (1993),
Hambrick and Finkelstein (1995) and Barkema and Pennings (1988)) are not very strong. This is partly because they make use of potentially questionable measures of power, partly due to the study designs adopted. Three types of power measures have been used. The first is the manager’s own shareholdings, which is hypothesized to have an inverted U-shaped relation with the manager’s pay (Finkelstein and Hambrick (1989), (1996), Lambert, Larcker and Weigelt (1993)).
A second measure is the chief executive’s ability to appoint outsiders on the board (Wade,
O’Reilly and Chandradat (1990), Lambert, Larcker and Weigelt (1993), Core, Holthausen and
Larcker (1999), Hallock (1997)) as proxied by the insiders’



References: Aggarwal Rajesh and Andrew Samwick (1999), Performance Incentives within Firms: The Effect of Managerial Responsibility Aghion Philippe and Jean Tirole (1997), ”Formal and Real Authority in Organizations”, Journal of Political Economy (105), 881-919 Barkema Harry and Johannes Pennings (1998), ”Top Management Pay: Impact of Overt and Bebchuk Lucian, Jesse Fried and David Walker (2002), “Managerial Power and Rent Extraction in 751-846 Boyd Brian (1994), ”Board Control and CEO Compensation”, Strategic Management Journal Core John, Robert Holthausen and David Larcker (1999), “Corporate Governance, Chief Executive 371-406 Eriksson Tor (2000), ”What Determines Managers’ Pay? Evidence from Denmark”, Long Range Planning (33), 544-559 Eriksson Tor and Mette Lausten (2000), “Executive Pay and Firm Performance: Danish Finkelstein Sidney and Donald Hambrick (1989), ”Chief Executive Compensation: A Study of the Intervention of Markets and Political Processes”, Strategic Management Journal (10), 121-134 Finkelstein Sidney and Donald Hambrick (1996), Strategic Leadership: Top Executives and their Organizations. Minneapolis; West Publishing Company Frey Bruno and Marcel Kucher (1999), Managerial Power and Compensation Empirical Research in Economics, University of Zürich, Working Paper 28 Hallock Kevin (1997), “Reciprocally Interlocking Boards of Directors and Executive Compensation”, Journal of Financial and Quantitative Analysis (32), 331-334 Hambrick Donald and Sidney Finkelstein (1995), ”The Effects of Ownership Structure on Hart Oliver and John Moore (1999), On the Design of Hierarchies: Coordination versus Specialization Hausman Jerry (1978), “Specification Tests in Econometrics”, Econometrica (46), 1251-1271 Lambert Richard, David Larcker and Keith Weigelt (1993), ”The Structure of Organizational Incentives”, Administrative Science Quarterly (38), 438-461 Murphy Kevin (1999), “Executive Compensation”, in Orley Ashenfelter and David Card (eds), Rosen Sherwin (1982), ”Authority, Control, and the Distribution of Earnings”, Bell Journal of Economics (13), 311-323 Rosen Sherwin (1992), ”Contracts and the Market for Executives”, in Lars Werin and Hans Wijkander (eds), Contract Economics Schmidt Dennis and Karen Fowler (1990), ”Post-acquisition Financial Performance and Executive Compensation”, Strategic Management Journal (11), 559-570 Troske Kenneth (1999), “Evidence on the Employer Size-Wage Premium from WorkerEstablishment Matched Data”, The Review of Economics and Statistics (81), 15-26 Wade James, Charles O’Reilly and Ike Chandradat (1990), ”Golden Parachutes: CEOs and the Exercise of Social Influence”, Administrative Science Quarterly (35), 587-603

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