Orders of Merit and CEO Compensation: Evidence from a Natural Experiment

• DOI: http://doi.org/10.1111/corg.12118
• Author: Linus Siming
• Published date: 01 January 2016
• Date: 01 January 2016

Orders of Merit and CEO Compensation: Evidence

from a Natural Experiment

Linus Siming*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Governmentsworldwide bestow ordersof merit upon their citizens asa recognition of distinguished

service. In this paper, I study whetherorders of merit can function as an external formof perquisite through which the govern-

ment can supplement the compensation given by a publicly listed f‌irm to the CEO.

Research Findings/Insights: I build upon the literature on perquisites to develop hypotheses on the relationship between or-

ders of merit and executive compensation. The predictions are tested through an empirical analysis that revolves around the

1974 legal reform in which Sweden discontinued the conferral of orders of merit to citizens. The difference-in-differences

methodology I employ enables me to make causal statements on the relationship between orders of merit, f‌irm performance,

and monetary compensation. I f‌ind that orders of merit function as symbols that visibly conf‌irm social status vis-à-vis the

general public and are valued by CEOs as a substitute for the need to engage in conspicuous consumption.

Theoretical/Academic Implications: This study providesempirical support that ordersof merit can be seen as an externalform

of perquisite that can substitute for monetary compensation. Essentially, this is evidence that governments can affect CEO

salaries through the provision of a non-monetary status good. The f‌indings also indicate that CEOs not only care about

distinguishing themselves as “superstars”among their peer group of corporate leaders but also value non-monetary symbols

that emphasize their social status in relation to the general public.

Practitioner/Pol icy Implications: Companies should take into account that CEOs may receive valuable status goods fromthe

government when determining compensation policies. In addition, governments should consider that the removal of non-

monetary awards may result in higher levels of monetary compensation in publicly listed f‌irms.

Keywords: Corporate Governance, Executive Compensation, Business-Government Relations, Agency Theory, Scandina-

vian Economies

INTRODUCTION

On July 15, 1815, Napoleon Bonaparte surrendered to

Captain Frederick Maitland on board the British ship

HMS Bellerophon outside the French port of Ile d’Aix. During

the subsequentcrossing of the English Channel,the abdicated

emperor of the French conf‌ided in his captor that “asoldier

will f‌ight long and hard for a bit of colored ribbon”(see

Maitland, 1826, for his own narrative of these events). The

ribbon Napoleon had in mind was the red piece of silk from

which the insignia of the Légion d’honneur hangs. This order

of merit is still awarded to soldiers for military feats or to

citizens for civic achievements. Can Napoleon’sassertionbe

applied to the corporate world? Will a modern-age chiefexec-

utive off‌icer (CEO) put a value on whether their long, hard

f‌ight to reach the top echelons of the corporate world is

rewarded by a piece of colored ribbon? And if they do, will

that impact how CEO compensation policies are set?

Government awards come in many different forms. Some,

like the Presidential Medal of Freedom in the United States

or British knighthoods and damehoods, are awarded most

sparingly to CEOs and may be used by the government to

induce certain ex ante behavior in potential recipients (Raff

& Siming, 2014). However, the vast majority of government

awards, such asorders of merit, are bestowed muchmore fre-

quently. Most governments around the world bestow orders

of merit upon their citizens to reward distinguished service

(Sainty, 2006). For example, Francehas three national and four

ministerialorders of merit, whereas Canada awardssix differ-

ent types of state orders; the Russian Federation has 16 state

orders, and the British honors system includes 10 orders.

Orders of merit are visible indicators of high social status

(Graff‌in, Bundy, Porac, Wade, & Quinn, 2013) that consist of

a title and some form ofwearable insignia. The highly visible

prestige embedded in orders of merit does not appear to be

impaired by the fact that they are generally bestowed more

or less automatically on individuals who have reached the

top hierarchical levels within their organizations. Although

this is most easilyseen with individuals holding publicoff‌ice,

*Addressfor correspondence: LinusSiming, Department of Financeand IGIER, Bocconi

University, Via Roentgen 1, 20136 Milan, Italy. Phone: +39-02-5836-3462; Fax: +39-02-

5836-5920;E-mail: linus.siming@unibocconi.it

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12118

64

Corporate Governance: An International Review, 2016, 24(1): 64–78