New Directions on Compensation and Upper Echelons

• DOI: http://doi.org/10.1111/corg.12005
• Author: Marta A. Geletkanycz,Wm. Gerard Sanders
• Date: 01 November 2012
• Published date: 01 November 2012

Commentary

New Directions on Compensation and

Upper Echelons

Marta A. Geletkanycz* and Wm. Gerard Sanders

Fifteen years ago, executive compensation research was

characterized as limited in both perspective and com-

pelling insights (Gomez-Mejia & Wiseman, 1997). A similar

description is unlikely to be applied today. In the intervening

years, few topics have been as richly explored or examined

from such a vast array of perspectives, including paradigms

rooted in economics, sociology, and psychology. While

numerous theories are germane to the topic of executive

compensation – and to be sure, their application has sub-

stantively informed our understanding – the Upper Ech-

elons (UE) perspective (Hambrick & Mason, 1984) holds a

position of distinction among them. After all, it is diff‌icult to

appreciate the structure and composition of pay packages,

much less their determinants and ensuing implications

absent insight into top executives’ experiences, activities,

and interests. And therein lies UE’s unique contribution. UE

reminds us not only of the critical link between executive

compensation and f‌irm performance – namely, top managers

and their strategic decisions – it also brings to light one of

the more fundamental reasons why the compensation-

performance relationship has proven so tenuous.

At its core, the UE perspective highlights the fact that

executives vary along a number of critical dimensions. Each

exhibits not only a distinctive background, value orientation,

and skill set, but also a unique psychological prof‌ile (Child,

1972; Hambrick & Mason, 1984). Thus, executives differ not

only in their human capital, but also in their motivations,

intentions, and risk preferences. When executives are con-

vened as a top management team (TMT), an altogether new

set of challenges emerges. Specif‌ically, variation inherent in

executives’ prof‌iles introduces dynamicsthat have profound

effects on the nature and behaviors of the broader top man-

agement group. By extension, the challenge of crafting pay

packages designed to effectively incentivize senior manage-

ment and advance f‌irm interests is elevated.

In this work, we explore some of the inroads afforded by

research at the intersection of the UE perspective and execu-

tive compensation. Our overarching aim, however, is not

retrospective. Extant reviews already afford a comprehen-

sive synthesis and reconciliation of the literature (e.g.,

Devers, Cannella, Reilly, & Yoder, 2007; Finkelstein, Ham-

brick, & Cannella, 2009; Gomez-Mejia & Wiseman, 1997).

That being the case, our objective is more so prospective.

Using the UE framework as a guide, we examine recent

research and contemporary trends surrounding the practice

of both executive compensation and corporate governance,

more broadly (e.g., new regulatory requirements, recent

board norms). We subsequently outline what we believe are

some of the more interesting questions and issues awaiting

investigation.

In our view, address of these questions and issues is not

only likely to advance progress on a number of persistent

compensation-related puzzles (e.g., why a def‌initive link

between pay and performance has proven elusive), it also

recasts the topic in a somewhat new light. In particular, we

suggest that compensation is not only a factor that affects

executives’ strategic choices and ultimately, f‌irm perfor-

mance (e.g., Devers et al., 2007; Finkelstein et al., 2009), it

has evolved into a factor that itself shapes the composition

and interaction of the top management team. Our work also

highlights several dimensions of compensation that fall

outside of the cast of usual suspects (e.g., pay levels, struc-

ture), yet nonetheless hold important consequence. In all,

we believe that research at the intersection of the UE per-

spective and compensation has proven highly valuable. At

the same time, a rich array of new and important questions

awaits investigation.

COMPENSATION AND UPPER ECHELONS:

ESTABLISHED INROADS

The Original View

From its f‌irst inception, UE conceived of organizations and

their major prof‌iles as ref‌lections of senior management

(Hambrick & Mason, 1984). The perspective argues execu-

tives will f‌ilter information about the f‌irm, its environment,

competitors, etc., through the lens of their experience and

values, and effect decisions very much shaped by those

*Address for correspondence: MartaA. Geletkanycz, Boston College, Carroll School of

Management, 140 CommonwealthAvenue, Chestnut Hill, MA 02467, USA. Tel: 617-

552-0439; E-mail: geletkan@bc.edu

519

Corporate Governance: An International Review, 2012, 20(6): 519–525

© 2012 Blackwell Publishing Ltd

doi:10.1111/corg.12005