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CEO POLITICAL IDEOLOGIES AND PAY EGALITARIANISM

WITHIN TOP MANAGEMENT TEAMS

M. K. CHIN
Kelley School of Business
Indiana University
Bloomington, IN 47405

MATTHEW SEMADENI
Arizona State University

INTRODUCTION

Organizational scholars, especially those who have researched the influence of CEOs on
various organizational outcomes, have long acknowledged the importance of CEOs’ values in
their decisions. However, since Hambrick and Mason (1984) emphasized CEOs’ values as one of
the key factors affecting their decision-making processes, there has been little systematic inquiry
as to what extent CEOs inject their personal values into their decisions. Although some scholars
have shown that CEOs’ values influence certain organizational outcomes—such as the degree of
behavioral integration within top management team (TMT) (Simsek, Veiga, & Lubatkin, 2005),
corporate social responsible profile (Chin, Hambrick, & Trevino, 2013)—there still remains
unanswered, but important, questions. For instance, do CEOs’ values, especially manifested in
their political ideologies, affect how they share financial rewards with other top executives?1
This question is of great importance for multiple reasons. First, it sheds light on the
importance of the relatively under-researched characteristics of CEOs in guiding their actions
and organizational outcomes. According to upper echelons theory (Hambrick & Mason, 1984),
CEOs’ values, along with experience and personality, are important factors influencing multiple
organizational outcomes. Given that individuals’ political ideologies have been shown to be a
reflection of personal values in political science and psychology literature (Barnea & Schwartz,
1998; Jost, Glaser, & Kruglanski, 2003), CEOs’ political ideologies are also expected to affect
various organizational outcomes. Furthermore, given that CEOs are known to be typically
involved in the wage-setting process of top executives (Graffin, Wade, Porac, & McNamee,
2008), it is important to examine to what degree CEOs’ political ideologies are injected into
TMT pay arrangements.
Additionally, TMT pay arrangements have been considered to be of both theoretical and
practical importance given that TMT members play critical roles in implementing company
strategy and that compensation is a substantial motivator influencing top executives’ attention
and behavior (Cho & Hambrick, 2006). As such, the question of how top executives are paid has
drawn the attention of scholars in multiple fields, including economics, finance, sociology, and
management (Devers, Cannella, Reilly, & Yoder, 2007). Previous literature on top executives’
pay, however, has focused primarily on CEO compensation (Finkelstein, Hambrick, & Cannella,
2009). Although an increasing number of scholars in organization studies have broadened their
scope to include other TMT members over the last decade, there are still some unaddressed
issues in the literature (Geletkanycz & Sanders, 2012).
One of the most critical shortcomings in the literature on top executives’ pay is the lack
of a group perspective, particularly regarding inter-temporal movement. Given that TMTs are
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better understood when one acknowledges that “top management teams are really groups”
(Finkelstein et al., 2009: 361) and that collective rewards linked with common outcomes are
often used when compensation is designed for a group (Katz, 2001), it is important to heed the
notion that TMT pay is also decided based on group consideration. For instance, some firms may
tie all top executives’ compensation to firm performance (rather than tie it to individual
performance), thereby making their top executives’ pay rise and fall together. In this situation,
firms can expect their TMT to function more cohesively as a group because top executives will
be more mindful of the effectiveness of other members.
Although some scholars have paid attention to the group perspective by studying pay
disparity inside TMTs (Fredrickson, Davis-Blake, & Sanders, 2010), they neglected the
possibility that firms vary in terms of the degree to which top executives’ pay moves collectively
over time. Instead, scholars have been more interested in the simple differences in pay levels and
have tested two types of pay disparity: vertical, which is defined as pay differentials between
CEO and non-CEO executives; and horizontal, which is defined as pay dispersion among non-
CEO executives (Siegel & Hambrick, 2005). As a result, despite their contribution, these studies
are somewhat limited in that the question of when pay among TMT members varies together
inter-temporally has not been addressed.
Furthermore, there are disagreements between the two main theoretical perspectives that
guide pay disparity studies. Scholars anchored in economic theory, such as tournament theory
scholars, argue that pay disparity is set up as an incentive for TMT members and reduces
monitoring costs (Conyon, Peck, & Sadler, 2001; Main, O’Reilly, & Wade, 1993). In contrast,
socio-psychology scholars argue that pay disparity is a result of non-economic factors such as
social comparison (Fredrickson et al., 2010), the status of a CEO (Graffin et al., 2008), and CEO
pay structure (Wade et al., 2006). These two differently driven types of studies produce
inconsistent findings concerning the same phenomena; moreover, neither approach fully explains
the cause of these inconsistent results.
We argue that the main reason for the above limitations in the literature (a lack of group
perspectives in top executives’ pay and disagreements between the two main theoretical
perspectives on pay disparity) is due to the fact that researchers have hereto disregarded
important individual-level factors—namely, the values of CEOs. We argue that greater attention
should be paid to the role of CEOs’ political ideologies, especially in the context of TMT pay
arrangements, because there is still a lack of consensus on the antecedents and consequences of
TMT pay arrangements (Geletkanycz & Sanders, 2012), which will likely cause CEOs to face
great ambiguity and complexity regarding this issue. Under more ambiguous and complex
situations, the influence of CEOs’ values will be greater because they are more likely to rely on
what they value most or the most ideal structure that they believe will accomplish goals.
In this study, we focus on how CEO liberalism influences the ways TMT members are
paid. Based on the political science and psychology literature, which shows how liberal and
conservative individuals have different value systems, we argue that the way in which CEOs
share financial rewards and set up incentives within TMT will vary depending on their political
ideologies. Specifically, politically liberal CEOs espouse the importance of egalitarianism,
whereas political conservatives hold to free-market principles (Jost, 2006; Rasinski, 1987).
Given these different beliefs, we argue that a more liberal CEO will tend to have greater TMT
pay egalitarianism, which can be defined as the degree to which pay is arranged such that
financial rewards of executives are shared collectively. We specify three distinct facets of pay
egalitarianism: a) vertical pay equality, b) horizontal pay equality, and c) pay co-movement.
This study has multiple implications. First, by focusing on executive values, this study
contributes to upper echelons theory. This study offers important empirical evidence, reaffirming
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that upper echelon values influence the antecedents of TMT pay arrangements and, consequently,
that executive values are an important component of understanding organizational outcomes.
Second, the findings enhance the overall understanding of the determinants of TMT pay
arrangements by identifying specific individual-level elements (i.e., CEO values). These findings
are consistent with the argument that pay determination has a sociopolitical nature (Finkelstein et
al., 2009). Lastly, the results of this study demonstrate that economic and socio-psychological
perspectives on TMT pay are not necessarily incompatible because the decision of whether to
adopt one management approach over another is determined according to upper echelon values.
For instance, liberal CEOs’ decisions not to create intentional pay differentials within TMT are
supportive of socio-psychological perspectives, whereas conservative CEOs’ choice of setting up
more hierarchy in TMT pay structures is consistent with economic-based views.

EFFECTS OF CEOS’ POLITICAL IDEOLOGIES ON PAY ARRANGEMENTS

CEOs’ Values and Political Ideologies

According to upper echelons theory, executives’ values contribute to form an

individualized lens for each executive which, in turn, influences executives’ attentions and
choices (Hambrick & Mason, 1984). Indeed, values affect individuals’ choices and actions both
consciously and subconsciously. Some scholars have empirically tested for the possibility that
top executives’ values influence various organizational outcomes (Simsek et al. 2005; Chin et al.
2013). Finkelstein, Hambrick, and Cannella (2009) also propose that executives’ values are
likely to influence corporate goal-setting processes.
The political science and psychology literature contains ample evidence showing that
individuals’ political ideologies reflect their values (Barnea & Schwartz, 1998; Goren et al.,
2009). Feldman (2003: 477) notes the “substantial amount of evidence [suggesting] that values
are a major source of structure for political attitudes.” Jost (2006: 653) also argued that “ideology
helps to explain why people do what they do; it organizes their values and beliefs.”

CEO Liberalism and Pay Arrangements

Our focus in this study is upon diverging worldviews between liberals and conservatives
in terms of their differing stances on egalitarianism. Liberals tend to be greater practitioners of
equality (Hirsh, DeYoung, Xu, & Peterson, 2010). According to Rasinski (1987), people who
identify themselves as liberal are more likely to support redistributive economic policies. In other
words, liberals are more supportive of the equality of outcomes, whereas conservatives are more
comfortable with the unequal distribution of outcomes (Verba & Orren, 1985; Graham et al.,
2009). Further, since liberals believe that equality trumps rank and status, they should be
reluctant to design mechanisms that will increase the inequality in a group (Thompson, Ellis, &
Wildavsky, 1990). In contrast, conservatives, who place more value on free-market competition,
will be more accepting of setting individual incentives differently.
In addition, according to Rasinski (1987), those who endorse egalitarianism (a liberal
trait) tend to underscore interpersonal interactions and mutual dependence in the workplace,
whereas those who uphold proportionality (a conservative trait) place more emphasis on personal
independence and ambition. Egalitarians are also known to foster group identities (Thompson et
al., 1990). As such, liberal CEOs, who place more value on interpersonal interactions and mutual
dependence, will strive to have greater pay co-movement within TMTs.
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Hypothesis 1. The greater the political liberalism of a company’s CEO, the greater will
be the pay egalitarianism within the TMT. Specifically, compared to a conservative CEO,
a liberal CEO will have greater (a) vertical pay equality, (b) horizontal pay equality, and
(c) pay co-movement within the TMT.

The Moderating Effects of Recent Firm Performance

Political ideology reflects the beliefs held by the CEO and these beliefs will effect the
decisions made by the CEO as they manage the firm, but they are by no means the only factors
influencing the decisions made. One of the most influential factors affecting this decision-
making is firm performance (Coombs & Gilley, 2005; Henderson, Miller, & Hambrick, 2006).
We argue that when CEO is placed under the pressure exerted by poor performance, they will
more strongly rely on their beliefs about the most effective way to manage the firm. For CEOs
with higher liberalism, we propose that under lower performance the CEO will implement
greater equality in the compensation of the top managers. This egalitarianism also strengthens
the sense that the CEO and top managers must work together to address the performance issue,
rather some executives being disproportionately rewarded (or punished) in the face of the
performance pressure. Conversely, in the absence of the pressure exerted by poor performance,
we argue that CEO beliefs will have less of an effect on CEO decision-making. In the absence
of a performance-induced crisis, CEOs will have less need to draw upon their beliefs about
organization and motivation and therefore will be less inclined to implement equality.

Hypothesis 2. Recent firm performance will negatively moderate the effects of CEO
liberalism on pay egalitarianism within the TMT. Specifically, under poor performance,
CEO liberalism will have a stronger effect on (a) vertical pay equality, (b) horizontal pay
equality, and (c) pay co-movement within the TMT.

METHODS
Sample

The sample for this study consisted of Standard & Poor’s 500 firms’ CEOs appointed
between 2007 and 2010. We had 472 firm-year observations with a pooled sample of 176 CEO.
TMT consists of the five highest paid executives listed in the Execucomp database.

Dependent Variables

Three variables were used as dependent variables: vertical pay equality, calculated by log
difference between the average pay of all other TMT members and the pay of the CEO
horizontal pay equality, measured by the inverse of the coefficient of variation in the total pay of
other TMT members, and pay co-movement, measured by checking whether the pay of non-CEO
executives was moved in the same direction as that of the CEO in the following year after the
CEO pay had been decided. More information is available from authors.

Independent Variable

Following Chin, Hambrick, and Trevino’s (2013) unobtrusive measures for the CEO
liberalism variable, we measured each CEO’s political liberalism by using data on individual
political contributions to examine the degree to which he or she supported the Democratic Party.
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Moderator and Control Variables

To test H2, we used firm’s market-to-book ratio in the year prior to each focal year (t+n-
1). Control variable list is available from the authors.

Estimation Methods

We used generalized estimating equations, using the xtgee command in Stata 13.0.

RESULTS

The results provide general support for our hypotheses. Detailed results, tables, and
figures are available from the authors.

Additional Analyses

We conducted post-hoc analyses for vertical pay equality using bonus pay, instead of
total pay, for the same regression models. The results are consistent with our hypotheses.

DISCUSSION

This study is one of the first to introduce and test the idea that TMT pay arrangements are
affected by CEO political liberalism. In testing this idea, we focused on three aspects of pay
arrangements: vertical pay equality, horizontal pay equality, and pay co-movement within TMT.
The results provide support for our hypotheses on horizontal pay equality and pay co-movement,
but no support for vertical pay equality. However, in the additional analysis that used bonus pay
instead of total pay, we found that CEO liberalism also increases vertical pay equality. In sum,
more liberal CEOs tend to have less pay differentials in bonus pay between themselves and other
top executives, to reduce total pay differentials among other top executives, and to move their
and other top executives’ total pay together over time. As such, the results do provide general
support for our assertions because they show that all of three aspects of TMT pay arrangements
are under the influence of CEO liberalism.
We also examined the effect of an important moderator, firm performance, on the effect
of CEO liberalism on pay equality. Our findings provide compelling evidence of the proposed
theory: both vertical pay equality and horizontal pay equality are effected by CEO liberalism
under below average performance, with this effect disappearing as performance reaches average
and above average levels. We argued that this was due to the pressure on the CEO and TMT
brought on by poor performance, and when performance exigencies receded the effect of CEO
liberalism would be less pronounced. This provides an important boundary condition on the
effects of CEO beliefs – our findings suggest that they are most important under crisis situations
and less so when the crisis abates.
The mixed support for the main effect across different types of pay is likely to result from
the fact that CEOs tends to have greater discretion in deciding bonus pay levels than their own
total pay levels. While CEOs are considered to have “nearly total control over the pay of other
executives in their companies” (Chatterjee & Hambrick 2007: 364), they probably do not have
the same amount of leeway to determine their own total compensation. The previous literature on
CEO compensation has revealed that factors other than CEOs’ characteristics, such as the board
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of directors and industry conditions, have significant influence in determining CEO total pay
level. Therefore, even if more liberal CEOs want to adjust their total pay to match their personal
values, they may be simply unable to do so given these constraints.
Alternative explanation for the mixed support is that CEOs may use different standards
when comparing their pay with that of other top executives than when comparing pay among
other top executives only. In other words, CEOs may simply feel that their total pay, which
includes non-cash pay (e.g., stock options and restricted stock), is not comparable with that of
other top executives. This suggests the possibility that the motivations for assigning non-cash
pay to CEO and non-CEO executives may be different. Given the streams of research indicating
that the main reason to set up non-cash pay for CEOs is to resolve agency problems (Gerhart,
Rynes, & Fulmer, 2009), non-cash pay given to non-CEO executives may be regarded as
representing shared-fate rewards rather than as a monitoring device to reduce agency cost, as
suggested in some previous studies (Goodwin, Wofford, & Whittington, 2001). Furthermore,
given our results for pay co-movement that more liberal CEOs tend to link their total pay with
that of other top executives, whereas more conservative CEOs do not tie their and top
executives’ total pay, CEOs’ philosophy on total pay, including non-cash pay, may vary
depending on their political ideologies. In other words, the reason that liberal CEOs tend to
consider their total pay and other top executives’ total pay together may be that liberal CEOs
consider shared-rewards aspect in total pay more than conservative CEOs.

Implications and Future Research

This study has several important implications for both TMT pay and the upper echelons
literature. First, it provides new insights into the literature on TMT pay arrangements. By
showing that CEO liberalism affects TMT pay structure, the results of the study broaden the
understanding of the determinants of TMT pay arrangements. Furthermore, this study suggests
that it is possible to reconcile the current literature’s conflicting perspectives on the determinants
of TMT pay arrangements. Conservative CEOs are more likely than liberal CEOs to have a less
egalitarian and more hierarchical pay structure, and thus the tournament theory or agency theory
better explains the TMT pay arrangements of these firms. At the same time, the beliefs of liberal
CEOs positively impacted several aspects of pay equality, suggesting a more collectivist
approach. It is also noteworthy that these effects exist under conditions of poor firm performance
but fade as performance improves. This study also contributes to the upper echelons theory by
presenting important empirical evidence that CEOs’ values, reflected in political liberalism.
One limitation of our study is we examined only CEO liberalism and did not assess the
beliefs or values of the TMT. It is an open question how the beliefs and values of the TMT
interact with the beliefs of the CEO. Also, the scope of top executives is restricted to only the
five highest paid executives. Furthermore, the question of whether liberal CEOs show greater
egalitarianism toward employees other than TMT members also merits further investigation.

ENDNOTES

1. In this study, top executives and TMT members are used interchangeably, and they include
both CEO and non-CEO executives. CEO is only referred to as “CEO,” whereas non-CEO
executives are referred to as “other top executives” and “other TMT members.”

REFERENCES AVAILABLE FROM THE AUTHORS

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