C-suite incentive conflict and firm efficiency
Kienpin Tee, Feng Han, Ghulame Rubbaniy, Costas SiriopoulosPurpose
This article provides empirical support to a long-debated theory in behavioral and organizational management literature regarding how the incentive conflict of firms' executives affects the firm's efficiency.
Design/methodology/approach
The study employs panel regression techniques, using efficiency measures derived from data envelopment analysis (DEA) and stochastic frontier analysis (SFA) as dependent variables, and a novel measure of C-suite incentive conflict as the independent variable, based on annual data from US companies covering the period 1992–2018.
Findings
Our results show that incentive conflict improves firm efficiency and thus support the constructive impact of C-suite conflict on firm efficiency. We find that the positive impact of incentive conflict on firm efficiency is weakened when the CEO is more powerful. Our findings provide support to agency theory by documenting that a more diverse board of directors reinforces the positive relationship between incentive conflict and firm efficiency.
Research limitations/implications
One limitation of this study is that the dataset is restricted to the period ending in 2018, which may limit the ability to capture more recent developments in corporate governance practices and executive incentive structures. Although the findings provide important insights for corporate executives and policymakers, extending the dataset to more recent years would improve the timeliness and generalizability of the analysis. Future research may address this limitation by incorporating updated data to examine whether the observed relationships persist under evolving global economic and governance conditions.
Practical implications
Our study provides two key implications for promoting sustainable business models for the corporations. First, the positive impact of incentive conflict on firm efficiency may suggest that employers design executives' compensation packages where the Vega differences between CEOs and non-CEO executives are above the median can be a benchmark. Second, corporations may design policies to minimize CEO's power and improve the positive impact of incentive conflict on firm efficiency by increasing the presence of minorities in the board of directors.
Originality/value
First, to the best of our knowledge, this study is a pioneer study in examining the relationship between firm efficiency and workforce conflict using a novel measure of incentive conflict. Second, this study involves an interdisciplinary investigation by applying econometric methods on financial data to provide empirical support to a long-debated theory about the impact of C-suite incentive conflict on firm efficiency in behavioral and organizational management literature. Finally, our study has at least two important policy implications for corporations. First, the positive impact of incentive conflict on firm efficiency may suggest that employers to benchmark the industrial median of incentive conflict to design executives' compensation packages where the Vega differences between CEOs and non-CEO executives are above the median. Second, corporations may design policies to minimize the CEO's power and encourage the presence of minorities in the board of directors to improve the positive impact of incentive conflict on firm efficiency.