The political ideology of corporate directors influences CEO compensation

Abhinav Gupta

How much is a CEO worth?

The answer to this increasingly debated question is subjective, of course, the product of individual biases.

One of the most powerful biases is political ideology. A new study by Abhinav Gupta in Administrative Science Quarterly finds that conservative-leaning boards of directors tend to pay their chief executives more money than liberal-leaning boards pay theirs.

Conservative boards also tie CEO pay more closely to firm performance, offering bigger financial rewards after periods of strong earnings or stock returns, and imposing harsher penalties after periods of weak performance—from a higher average baseline.

Writing on the study in the London School of Economics (LSE) Business Review, Gupta and his co-authors credit the observed conservative pay premium to a fundamental difference in the way that liberals and conservatives view the impact of leaders.

“Directors political ideologies may shape their perceptions of how much—or how little—CEOs matter to a firm’s profitability and survival,” they write. “According to our theory, conservative boards will be more inclined to believe that the fortunes of an organization hinge on the actions of its CEO. And this higher assessment of CEO impact translates into higher CEO pay.

“In contrast, liberal boards are more likely to attribute firm performance to social structures, market conditions and broader environmental factors, resulting in lower CEO pay.”

Read the entire article in the LSE Business Review, and online publication of the London School of Economics and Political Science that delivers the latest in topical academic research to business leaders.