Political Affiliation and Pay Slice: Do Blue CEOs Accept Less Green?

• Published date: 01 September 2018
• Author: Richard Borghesi,Kiyoung Chang
• DOI: http://doi.org/10.1111/irfi.12133
• Date: 01 September 2018

Political Affiliation and Pay Slice:

Do Blue CEOs Accept Less Green?

RICHARD BORGHESI AND KIYOUNG CHANG

University of South Florida-Sarasota, Sarasota, FL, USA

ABSTRACT

We examine the relationship among CEO political alignment, compensation,

and pay disparity (relative to other high-earning executives) and find that

Democratic CEOs accept less pay and a significantly lower pay slice. That is,

left-leaning CEOs put their money where their mouth is regarding the

Democratic ideology of economic and social equity. This smaller pay gap is

not a function of variations in managerial ability; if anything, Democratic

CEOs are more talented than Republican CEOs. Results suggest that

Democratic CEOs may be more effective at running firms in which

collaboration among top executives is more valuable than are the potential

gains from tournament incentives.

JEL Codes: G34; J31; M12

1. INTRODUCTION

Republicans and Democrats differ fundamentally on social issues. In general,

Republicans support free markets and individual rights, whereas Democrats favor

economic and social equality, and research demonstrates that personal political

orientation is an important factor in the decision-making of corporate agents.

For example, firms led by right-leaning managers utilize less debt, have lower

research and development (R&D) expenditures, and take on less-risky

investments (Hutton et al. 2014). Francis et al. (2016) find that partisan CEOs

are associated with a higher level of corporate tax sheltering, with political

ideology (economic incentives) dominating Republican (Democratic) CEOs’tax

sheltering decisions. Hong and Kostovetsky (2012) demonstrate that politics

can influence investment decisions—fund managers who make more

contributions to Democrats hold fewer positions in firms that are socially

irresponsible. Likewise, investments in corporate social responsibility are affected

by the political leanings of corporate managers, with Democratic founders, CEOs,

directors, and employees guiding their firms to engage more heavily in corporate

social responsibility activities (Di Giuli and Kostovetsky 2014; Borghesi 2016).

Political ideology spills over into compensation decisions as well. Gupta and

Wowak (forthcoming) propose that behavior channeling (a process by which

individuals favor courses of action that suit their personal values and beliefs)

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 2017

DOI: 10.1111/irfi.12133

International Review of Finance, 18:3, 2018: pp. 453–461

DOI:10.1111/irfi.12133

© 2017 International Review of Finance Ltd. 2017