Factor analysis of executive compensation determinants: survey evidence from executives and non‐executive investors

Abstract

Purpose This paper seeks to examine the differences between executives and investors in the perception of determinant factors in executive compensation. Design/methodology/approach From a survey instrument comprised of archival executive compensation determinant items, a factor analysis is performed to examine the construct determinant perceptions unique to executives and non‐executive investors. Findings The authors find differences in factors between executives and non‐executive investors in a manner expected by agency theory. Non‐executive investors place greater weight on factors related to performance and less weight on human capital factors, while executive investors place greater weight on human capital factors in determining executive compensation. Research limitations/implications This study is limited in that the sample may not be representative of the population of chief executive officers or shareholders in the USA. Practical implications Differing factors suggest that there is a misalignment of measures desired to be the foundation of executive compensation. The differing measures used to potentially motivate agents (executives) by principals (investors) results in an agency cost. Originality/value The authors have documented a difference between executives and investors in factors desired to determine executive compensation.