Publications
Publications
- 2024
- HBS Working Paper Series
Corporate Culture Homogeneity and Top Executive Incentive Design: Evidence from CEO Compensation Contracts
By: Dennis Campbell, Ruidi Shang and Zhifang Zhang
Abstract
We examine how corporate cultures characterized by high degrees of homogeneity in the underlying values and beliefs of organizational members are related to the design of CEO incentive compensation contracts. We argue that culture homogeneity within firms lowers ex post monitoring costs for boards and shareholders and reduces the need to rely on ex ante incentives for CEOs and other top executives. Drawing on economic theories of corporate culture and using a text-based measure of corporate culture homogeneity, we predict and find that firms with higher degrees of corporate culture homogeneity tend to rely less on CEO equity pay and more on non-financial performance metrics conditional on granting equity. We also find that firms with higher degrees of corporate culture homogeneity do not substitute lower equity pay with higher fixed pay or bonuses, yielding both lower CEO variable and total pay. These results also hold for CFOs and other top executives. Our study contributes to the literatures on both corporate culture and CEO compensation by providing the first systematic evidence that corporate culture homogeneity is an important consideration in understanding differences in the design of top executive incentives across firms.
Keywords
Corporate Culture; Compensation Design; Accounting; Management Control; Incentive Systems; Organizational Culture; Job Design and Levels; Governance; Executive Compensation; Motivation and Incentives
Citation
Campbell, Dennis, Ruidi Shang, and Zhifang Zhang. "Corporate Culture Homogeneity and Top Executive Incentive Design: Evidence from CEO Compensation Contracts." Harvard Business School Working Paper, No. 24-054, February 2024.