Top managers in Europe:

Education, international experience, and compensation

Inaugural dissertation

submitted to attain the academic degree

doctor rerum politicarum

(Doktor der Wirtschaftswissenschaften)

at the

ESCP Europe Business School Berlin

by

M.Sc., Frederic Altfeld

born on 24 February 1987 in Bochum

Berlin

2017

Doctoral examination committee

Head: Prof. Dr. Ulrich Pape

Examiner: Prof. Dr. Stefan Schmid

Examiner: JProf. Dr. Tobias Dauth

Day of disputation: September 7, 2017

I

Table of contents

List of abbreviations ................................................................................................................ II

1. Introduction........................................................................................................................ 1

2. The study of top managers ................................................................................................ 4

2.1. The relevance of top managers ................................................................................ 4

2.2. Top managers’ characteristics .................................................................................. 8

2.3. Top managers’ compensation ................................................................................ 12

3. Description of research manuscripts ............................................................................. 14

3.1. Overview of research manuscripts ......................................................................... 14

3.2. Fundamental aims and assumptions ....................................................................... 18

3.3. Theoretical perspectives ......................................................................................... 21

3.4. Data collection and data basis ................................................................................ 24

4. Research manuscripts ..................................................................................................... 26

4.1. Research manuscript 1 ........................................................................................... 26

4.2. Research manuscript 2 ........................................................................................... 27

4.3. Research manuscript 3 ........................................................................................... 28

5. Conclusion ........................................................................................................................ 29

5.1. Contributions .......................................................................................................... 29

5.1.1. Contributions of manuscript 1............................................................. 29

5.1.2. Contributions of manuscript 2............................................................. 31

5.1.3. Contributions of manuscript 3............................................................. 35

5.2. Limitations and future research ............................................................................. 37

6. References ......................................................................................................................... 44

II

List of abbreviations

CEO Chief executive officer

CFO Chief financial officer

ed. Editor

eds. Editors

et al. Et alii

e.g. Exempli gratia (for example)

EUR Euro (currency)

GBP Great Britain Pound (currency)

i.e. Id est (that is)

MNC Multinational company

p. Page

US United States

USD United States Dollar (currency)

1

1. Introduction

Top managers have considerable influence over the fate of the organizations they lead.

In the last several decades, scholars have produced a large body of research providing

evidence that top managers can substantially affect organizational outcomes (Carpenter

et al., 2004; Finkelstein et al., 2009; Quigley & Graffin, 2017).1 Asserting that top

managers play a pivotal role in shaping organizational strategy and performance,

however, should not be seen as a glorification of corporate elites. Top managers’ actions

and decisions are the result of human limitations and biases, and their influence can be

for good or for ill (Cannella, 2001; Hambrick, 2007). In situations of complex,

uncertain, and ambiguous information that characterize much of managerial work,

decisions are affected by top managers’ individual experiences and psychological

properties (Dauth, 2012; Finkelstein & Hambrick, 1990; Geletkanycz & Hambrick,

1997). It is because such individual characteristics influence organizational outcomes

that top managers are an important part of a complete theory of strategic management

(Finkelstein et al., 2009). As Hambrick (1989, p. 5) put it, “if we want to explain why

organizations do the things they do, or, in turn, why they perform the way they do, we

must examine the people at the top.”

Prior research has shown that top managers’ characteristics are associated with

outcomes not only at the organizational level but also at the individual level (Carpenter

et al., 2004; Finkelstein et al., 2009; Schmid & Wurster, 2016, 2017). One such

outcome at the individual level is the top managers’ compensation. Executive

compensation receives great attention from various audiences, such as corporate actors,

1 Throughout this thesis, the terms “top manager” and “executive” are used interchangeably to refer to

individuals at the apex of a firm (Finkelstein et al., 2009; Hambrick & Mason, 1984).

2

academics, policymakers, and the society at large. The topic is surrounded by

considerable controversy and firms’ reporting season is routinely accompanied by

public outrage over supposedly “excessive” pay, especially in cases where top managers

receive large sums while delivering disappointing company performance (Jensen &

Murphy, 1990; Boyd et al., 2012; Gomez-Mejia et al., 2010). Executive compensation

has far-reaching implications not only at the level of the individual top manager but also

at the level of the firm and the society. For example, at the firm level, a large pay gap

between top executives and lower-level employees might have an adverse impact on

long-term firm performance (Bloom, 1999; Connelly et al., 2016).2 At the societal level,

rising executive compensation has been suspected to be a major force behind widening

income inequality in many societies (McCall & Percheski, 2010; Piketty, 2014; Piketty

& Saez, 2003, 2006). Hence, there is great interest in understanding the determinants of

executive compensation, especially since executive pay levels have been rising

considerably over the past decades (Anonymous, 2008; Carter et al., 2009; Frydman &

Jenter, 2010; Murphy, 2005, 2013). However, even though the topic of executive

compensation has been examined extensively by scholars of various disciplines such as

economics, accounting, finance, and management (Devers et al., 2007; Finkelstein et

al., 2009; Gomez-Mejia et al., 2010; Murphy, 1999, 2013), results are mixed and far

from conclusive.

The three research manuscripts that form the core of this thesis advance research on top

managers in a number of ways, extending knowledge in the area of executive

characteristics and in the area of executive compensation. All three manuscripts are

anchored in the European context and address topics that are relevant yet underexplored

2 Prior research suggests that pay dispersion can encourage employees to pursue short-term rewards at the

expense of long-term goals. Furthermore, pay dispersion can result in reduced motivation and feelings

of inequity, which can lead to uncooperative behaviour and higher levels of turnover that adversely

impact long-term firm performance (Bloom, 1999; Connelly et al., 2013).

3

in extant, mostly US centred top management literature (Boyd et al., 2012; Carter et al.,

2009; Dauth, 2012; Tosi & Greckhamer, 2004). Each manuscript has a distinct research

focus: manuscript 1 advances literature on executive characteristics by examining the

relevance of the doctoral degree for top managers in Germany. Thus, it sheds light on an

executive characteristic prevalent specifically among top managers in German speaking

countries (Davoine & Ravasi, 2013; Franck & Opitz, 2004). Manuscript 2 and

manuscript 3 are both concerned not only with executive characteristics but also with

executive compensation. Focusing on chief financial officers (CFOs), manuscript 2

analyses the relationship between CFOs’ international work experience and their

compensation levels. Manuscript 3 investigates how compensation levels of chief

executive officers (CEOs) are affected by various dimensions of Americanization.

Given that executive compensation levels are significantly higher in the US than they

are in Europe (Cheffins & Thomas, 2004; Conyon & Murphy, 2000; McCall &

Percheski, 2010; Murphy, 1999), Americanization might be a force compelling

European firms to adopt US-style compensation practices, raising CEO pay levels.

In order to develop conceptual logics that provide compelling explanations for the

examined relationships, the manuscripts integrate different theoretical lenses. The

hypotheses that are derived from theory are then tested on large samples of top

managers of German (manuscript 1) or European (manuscripts 2 and 3) companies

using quantitative empirical analysis.

The remainder of this thesis is structured as follows. Section 2 outlines the field of top

management research, explaining the relevance of top managers in general, their

characteristics, and their compensation. Next, section 3 provides an overview of the

research manuscripts; furthermore, the fundamental aims and assumptions, the

4

theoretical perspectives and the data basis used in the manuscripts are described.

Thereafter, section 4 presents the three research manuscripts that are the centrepiece of

this thesis. Finally, section 5 summarizes the contributions of the thesis and discusses

limitations and possible avenues for future research.

2. The study of top managers

2.1. The relevance of top managers

Do top managers matter? On the surface, this question seems almost trivial. Top

managers receive intense media attention that covers, for example, their decisions,

careers, personalities, and opinions. Strategic moves of companies are often depicted as

direct actions of their top managers, and success (or failure) of firms is often attributed

to the people at the top (Bültel, 2011; Graffin et al., 2013). This can even amount to

some top managers, usually CEOs, reaching celebrity status (Hayward et al., 2004;

Wade et al., 2006). Jack Welch at General Electric or Steve Jobs at Apple are examples

of such “celebrity CEOs” who are credited with leading their companies to outstanding

success. Conversely, top managers are routinely blamed for poor firm performance or

other corporate misfortunes, which can lead to top managers quickly losing their jobs

(Huson et al., 2004; Shen & Cho, 2005). However, perceptions of top managers as

pivotal drivers of firm outcomes, including performance, might well overestimate the

effect that upper echelons executives have. There is a strong human tendency,

sometimes described as the “romance of leadership”, to attribute a greater importance to

executives than they actually have (Chen & Meindl, 1991; Finkelstein et al., 2009;

Meindl et al., 1985). Succumbing to the “fundamental attribution error” (Weber et al.,

5

2001), people tend to bestow disproportionate credit and blame to top managers while

neglecting situational influences (Quigley & Hambrick, 2015).

In academic research, various relevant theories ascribe different degrees of relevance to

top managers. Historically, the popularity of these theories has varied, and with it the

interest in top managers (Finkelstein et al., 2009). In the very early phases of strategy

research, top managers were depicted as playing a crucial role in shaping firm strategy

(Chandler, 1962; Learned et al., 1961; Selznick, 1957). However, major organizational

theories that dominated scholarly research thereafter gave little attention to top

managers, assuming that they have little effect on organizational outcomes (Finkelstein

et al., 2009). According to these theories, outside forces dictate the course of an

organization, with little or no room for choices to be made by top managers. One

prominent theory in this regard is the population-ecology view (Dosi & Nelson, 1994;

Hannan & Freeman, 1977; Nelson & Winter, 1982), which focuses on the effects of

environment on organizational structure. The unit of analysis are populations of

organizations and variations in organizational form are viewed as largely accidental.

Individuals at the helm of organizations are assumed to have only little latitude of action

because organizations are constrained by internal and external inertial pressures. Hence,

scholars of the population-ecology view had “pretty much taken leadership and choice

out of the picture” (Cannella, 2001, p. 37).

In another influential theory of organization, the neo-institutional view (DiMaggio &

Powell, 1983; Meyer & Rowan, 1977; Scott, 2014; Zucker, 1987), top managers again

play only a marginal role. According to this perspective, organizations are embedded in

institutional environments and face pressures to conform to demands of these

environments. It follows that in the neo-institutional view, organizations were

6

fundamentally constrained by external demands for conformity, and therefore little

room was left for decision making by top managers. Similarly, in the economics-based

view that dominated strategic management research in the late 1970s and early 1980s

(Finkelstein et al., 2009), top managers were barely acknowledged. The focus was

instead on techno-economic factors such as industry analysis, portfolio matrices, and

competitive dynamics (Porter, 1980; Hambrick, 1989; Schendel & Hofer, 1979). Little

attention was paid to top managers because they were presumed to be rational decision

makers, capable of processing all the relevant economic information to arrive at the

optimal strategic decision (Hambrick, 1989).

A shift back toward a focus on top managers as an integral part of theories explaining

organizational outcomes began in the early 1970s (Finkelstein et al., 2009), starting with

the “strategic choice perspective” put forward by Child (1972). This perspective was

intended as a corrective to the dominating view which saw organizational characteristics

determined by environmental conditions but which “fails to give due attention to the

agency of choice by whoever have the power to direct the organization” (Child, 1972, p.

2). Strategic choice, understood as the process by which an organization’s dominant

coalition decides upon courses of strategic action, was suggested as a necessary element

in any theory of organizational functioning (Child, 1997). Then, in 1984, came the

seminal publication of Hambrick and Mason’s upper echelons perspective (Hambrick &

Mason, 1984), which acted as a catalyst for academic interest in top managers

(Carpenter et al., 2004; Finkelstein et al., 2009). The upper echelons perspective

suggests that “the organization becomes a reflection of its top managers” (Cannella,

2001, p. 38). More specifically, the premise is that top managers’ actions are based on

their personalized interpretation of a given strategic situation, and this interpretation is a

function of the top managers’ experiences, values, and personalities. Furthermore, the

7

upper echelons perspective proposes that top managers’ demographic characteristics can

be used as proxies for underlying (and more difficult to measure) constructs such as

cognitions, values, and perceptions (Hambrick, 2007; Hambrick & Mason, 1984).3 A

host of academic studies based on, or influenced by, the upper echelons perspective has

been published in the decades following Hambrick and Mason’s 1984 article, and until

today there is no sign of abating research interest (Finkelstein et al., 2009). Hence, the

field of organization and strategy research has redirected its attention to executives and

their role in shaping organizational outcomes.

In order to empirically investigate if and how much top managers, particularly CEOs,

matter for organizational outcomes, a number of studies have aimed to quantify the so-

called “CEO effect”, i.e. the degree to which CEOs can influence company performance

(Fitza, 2014). With a study by Lieberson and O’Connor in 1972 emerged a scholarly

debate about the magnitude of this effect that is still going on today (for a recent review,

see Hambrick & Quigley, 2014). Studies in this line of research usually employ

variance partitioning methodology to isolate the amount of variance that can be

attributed to the CEO as opposed to other factors (Ahn et al., 2009; Fitza, 2014;

Hambrick & Quigley, 2014; Lieberson & O’Connor, 1972; Mackey, 2008; Quigley &

Hambrick, 2015; Quigley & Graffin, 2017; Thomas, 1988). While results of individual

studies, as in all empirical research, vary, Quigley and Graffin (2017) suggest that there

is a “consensus” deriving from the plurality of prior work estimating the CEO effect at

around 15 percent. Recently, this consensus has been called into question by Fitza

(2014, 2017), who claims that methodological flaws in prior studies employing variance

decomposition methodology have resulted in inflated CEO effects. Fitza proposes that

once effects of random chance are accounted for, the CEO effect is not larger than 5.0

3 For further explanations of the upper echelons perspective, see section 2.2.

8

percent (Fitza, 2014) or even indistinguishable from the effect of chance (Fitza, 2017).

However, Quigley & Graffin (2017) have in turn challenged Fitza’s methodology and

conclusions, “reaffirming that the CEO effect is significant and much larger than

chance” (Quigley & Graffin, 2017, p. 793). Furthermore, Quigley and Hambrick (2015)

document that the CEO effect has grown in recent decades. This finding suggests that

increased attention to top managers, for instance by the media and general public, might

to some degree be explained and justified by an increase in the actual significance of top

managers. Another study, relying on event study methodology instead of variance

partitioning methodology, also arrives at the conclusion that CEOs have become

increasingly influential. Analysing shareholders’ reactions to unexpected CEO deaths,

the authors find that market reactions to such events have increased significantly over

the past decades (Quigley et al., 2017).

Summarizing the above, it becomes clear that both theoretical reasoning and empirical

evidence exist for the notion that top managers can affect organizational outcomes. Still,

it has to be acknowledged that the extent of top managers’ influence can vary

significantly. Top managers’ latitude of action, or managerial discretion, emanates from

environmental, organizational, and individual managerial factors (Crossland &

Hambrick, 2007; Finkelstein et al., 2009; Hambrick & Abrahamson, 1995; Hambrick &

Finkelstein, 1987). Therefore, depending on these factors, top managers are in a

position to have a greater or lesser impact on organizational outcomes. Overall,

however, prior theoretical and empirical literature suggests that top managers matter.

2.2. Top managers’ characteristics

Even if top managers matter, i.e. have significant influence on organizational outcomes,

it could be argued that individual top managers would hardly differ in the way they steer

9

a company. After all, in most cases top managers are highly educated and go through a

long and competitive selection process as they rise through the ranks (Busenbark et al.,

2015; Connelly et al., 2014; Conyon et al., 2001; Tian et al., 2011). As a result, the

variance in skills of those individuals reaching the top might be relatively low and each

would seem capable of analysing a strategic situation and decide on the appropriate

course of action (Fitza, 2014; Hambrick et al., 2005). However, research on the nature

of executive work shows that top managers generally are confronted with more stimuli

than they can adequately process, face myriads of decisions to make, and are constantly

under immense time pressure (Kotter, 1982; Matthaei, 2009; Mintzberg, 1971, 1973).

As a result, they are limited in the comprehensiveness of their analyses and search for

solutions (Hambrick et al., 2005). This view is consistent with upper echelons theory,

which suggests that the situations top managers face are usually characterized by

complexity, uncertainty, and ambiguity (Dauth, 2012; Hambrick, 2007; Hambrick &

Mason, 1984; Schwenk, 1988; Starbuck & Milliken, 1988). Upper echelons theory

draws on theorists of the Carnegie School (Cyert & March, 1963; March & Simon,

1958) and builds on the premise of bounded rationality to argue that in situations of

complex and uncertain information, human limitations and biases restrict an executive’s

ability for rational decision making. Complex decisions are the result of behavioural

factors rather than of perfectly rational optimization based on complete information

(Finkelstein & Hambrick, 1990; Geletkanycz & Hambrick, 1997). Hence, it is suggested

that “executives make choices through highly individualized lenses that are formed by

the managers’ experiences, personalities, and values” (Chin et al., 2013, p. 200).

The process through which top managers’ characteristics, i.e. executive experiences and

psychological properties (such as personality and values), shape top managers’ decision

making is described in a model that is at the core of upper echelons theory (Carpenter et

10

al., 2004; Dauth, 2012; Finkelstein et al., 2009; Hambrick, 2007; Hambrick & Mason,

1984). This model presumes a strategic situation which is complex and made up of a

plethora of stimuli from within and outside the organization. Top managers facing this

situation and trying to arrive at a decision cannot process all these stimuli, given their

bounded rationality. Instead, top managers’ strategic decisions are made on the basis of

their individual perception of the situation, or, in other words, their own “construed

reality” (Chatterjee & Hambrick, 2011; Nielsen & Nielsen, 2011; Sutton, 1987). The

centrepiece in converting the (objective) strategic situation into an individual perception

is a top manager’s “executive orientation”, encompassing experiences and

psychological factors, which create a “screen” between the situation and the eventual

perception (Hambrick & Mason, 1984). More specifically, top managers’ experiences

and psychological factors serve to filter and distort available stimuli in a three-step-

process by affecting: first, their field of vision, i.e. on which events, trends, news, and

conditions inside and outside the organization top managers focus their (limited)

attention; second, their selective perception, i.e. which stimuli from within their field of

vision are actually perceived and processed; and third, their interpretation, i.e. how they

attach meaning to those stimuli (Finkelstein et al., 2007; Hambrick, 2007; Starbuck &

Milliken, 1988). It follows that top managers’ perception of a given strategic situation,

and the strategic choices eventually made based on this perception, are highly

individualized. As Hambrick (1989, p. 5) notes, “no two strategists will identify the

same array of options for the firm; they will rarely prefer the same options; if, by remote

chance, they were to pick the same options, they almost certainly would not implement

them identically.”

A top manager’s “executive orientation” comprises two categories of characteristics:

psychological properties and observable experiences (Finkelstein et al., 2009;

11

Hambrick, 2005). Psychological properties, such as values, cognitions, and other

elements of personality, offer great potential for explaining top managers’ decisions and

behaviours. However, the use of psychological properties in large sample research on

top managers is severely hindered by methodological obstacles. First, psychological

properties are generally difficult to measure (Pfeffer, 1983), and second, top managers

are usually quite reluctant to participate in time-consuming psychological testing

(Hambrick & Mason, 1984). Therefore, upper echelons scholars encourage researchers

to rely on the second category of top managers’ characteristics, i.e. observable

experiences, and examine their associations with outcomes at the organizational or

individual level. Observable experiences, which are frequently called demographic

characteristics in upper echelons literature, are used as proxies for underlying, more

elusive and unobservable psychological properties.4 To date, researchers have examined

various types of executives’ demographic characteristics. Large parts of research have

focused on four major categories: executive tenure, functional background (such as

finance, marketing, etc.), education, and, more recently, international experience (for

reviews, see Carpenter et al., 2004; Finkelstein et al., 2009). Lately, the scope has been

broadened with studies investigating a vast array of different kinds of executives’

characteristics, for example gender (Lee & James, 2007; Perryman et al., 2016; Post &

Byron, 2015), political ideology (Briscoe et al., 2014; Chin et al., 2013; Gupta &

Wowak, 2016), fatherhood (Dahl et al., 2012), or social class origins (Kish-Gephart &

Campbell, 2015; Martin et al., 2016).

4 For limitations of this approach, see section 5.2.

12

2.3. Top managers’ compensation

The topic of top management compensation receives great attention and scrutiny not

only from academics but also from practitioners, politicians, and the media. The debate

regarding whether top managers are over- or underpaid has been ongoing for many

years and took place against the backdrop of an immense rise in top managers’

compensation levels, for example in the US and Europe. In the US, for which

availability of historical executive compensation data is much better as compared to

other countries (Fernandes et al., 2013; Murphy, 2013), executive pay was rather stable

in the period from the 1940s to the 1970s. By contrast, in the following decades a

remarkable surge in pay levels has taken place (Frydman & Jenter, 2010; Frydman &

Saks, 2010; Murphy, 2013; Van Veen & Wittek, 2016). This is illustrated in the rise of

the median total compensation of S&P 500 CEOs, which was at 3.0 million USD in

1992. Until 2012, this number has more than tripled, reaching 9.1 million USD

(Anonymous, 2014; Murphy, 2013). While the steep increase in executive pay might be

most pronounced in the US, similar patterns can be observed in other countries

(Anonymous, 2008; Carter et al., 2010; Conyon et al., 2011; Conyon & Schwalbach,

2000; Murphy, 2005; Van Veen & Wittek, 2016). Critics complain that as executive pay

went up, the gap between compensation of top managers and that of lower-level

employees has widened markedly. While in large US firms the ratio of CEO pay to that

of rank-and-file employees was at around 40-1 in the 1980s, this ratio grew to

somewhere between 140-1 and 335-1 nowadays, depending on the sample and

estimation technique used (Anonymous, 2016; Kiatpongsan & Norton, 2014; McCall,

2004; Shin, 2014). Not only the level but also the structure of executive compensation

has changed over the years. In the 1930s and 1940s, executive pay comprised mainly of

fixed salaries and short-term cash bonuses. In the decades that followed, long-term

13

compensation – particularly in the form of restricted stock awards and stock options –

grew more and more prevalent, accounting for an increasingly large share of total

compensation (Anonymous, 2014; Frydman & Saks, 2010; Murphy, 2013).

The relevance of executive compensation is reflected in the immense growth of

academic literature on this topic (for reviews see Devers et al., 2007; Finkelstein et al.,

2009; Gomez-Mejia et al., 2010; Murphy, 1999, 2013). Studies span a large variety of

theories and research questions, investigating, in broad terms, either the determinants or

the consequences of executive compensation. For decades, large parts of the literature

on the determinants of executive compensation were based on an economic logic and

have focused on the influence of firm size and firm performance on executive pay.

While firm size has frequently been found to be a robust predictor of executive pay

levels, the relationship between pay and performance is only weakly supported at best

(Finkelstein et al., 2009; Jensen & Murphy, 1990; Tosi et al., 2000). In response,

researchers have broadened the focus of executive compensation research, examining a

host of factors at the country, industry, firm, and individual level (Devers et al., 2010;

Gomez-Mejia et al., 2010). However, after decades of research on determinants of

executive compensation that produced a voluminous body of empirical literature, results

are often disparate. Even on fundamental issues such as the pay-performance-link,

results are mixed and scholarly conclusions range from “top executives are worth every

nickel they get” (Murphy, 1986, p. 125) to “there is no rational basis for the

compensation paid to top management” (Kerr & Bettis, 1986, p. 661). What researchers

can surely agree on is the assertion found in a recent literature review on the topic,

stating that “[e]xecutive compensation is a complex and contentious subject” (Frydman

& Jenter, 2010, p. 76). It becomes clear that further research is required to achieve a

more complete understanding of executive compensation. In this regard, recent calls in

14

the literature emphasize the importance to develop explanations of executive

compensation that go beyond economic factors to encompass social and political

perspectives (Cuevas-Rodríguez et al., 2012; Finkelstein et al, 2009; Murphy, 2013).

Furthermore, given the focus on US firms prevailing in large parts of executive

compensation literature (Boyd et al., 2012; Carter et al., 2009; Tosi & Greckhamer,

2004), knowledge about what determines executive compensation levels in Europe is

even less developed. Because prior research mostly deals with executives of US firms,

extant theories and empirical insights about executive compensation are

overwhelmingly derived from the US context. One reason for this narrow focus of

research attention might be that the US had in place requirements for disclosure of

detailed and individualized executive compensation data since the 1930s (which have

been significantly expanded over the years). In contrast, most other countries

historically required disclosure only of aggregate cash compensation for the top

management team, with little information on equity-linked pay components (Fernandes

et al., 2013; Murphy, 2013). The manuscripts of this thesis addressing CFO or CEO pay

take advantage of recently expanded disclosure rules on executive compensation in

many European countries, which allow the calculation of total pay levels of individual

executives.

3. Description of research manuscripts

3.1. Overview of research manuscripts

Three research manuscripts constitute the centrepiece of this thesis. While all three

manuscripts are grounded in top management research, each individual manuscript

focuses on specific research questions that address different gaps in the literature. In the

15

following paragraphs the research context, research questions, and methodological

approach of each manuscript are presented.

Manuscript 1 (“Der Doktortitel von Top-Managern der DAX-30-Unternehmen”)

analyses the role of the doctorate of top managers in large German firms. Comparative

international studies show that a strikingly high percentage of top managers in Germany

(and, similarly, Austria and Switzerland) hold a doctoral degree. For example, a recent

study by Davoine and Ravasi (2013) shows that in Germany nearly every second top

manager of a large firm has such a degree (45%), compared to only 6-7% in France and

in the UK. The high rate of doctoral degree holders among top managers in Germany is

a long-standing phenomenon, with studies routinely documenting rates of around 50%

since the 1970s (Booz-Allen & Hamilton, 1973; Buß, 2007; Hartmann; 2006; Oechsler

et al., 2008; Opitz, 2008; Poensgen, 1982). However, recent media reports suggest that

the importance of the doctorate for top managers might be in decline, for example

because other credentials and experiences are becoming increasingly relevant for

(aspiring) top managers (Engeser, 2011; Franck et al., 2004; Löhr, 2014; Opitz; 2005b;

Schmid & Wurster, 2017). Against this background, the manuscript sets out to examine

the relevance that the doctorate has for executives in Germany nowadays. To that end,

in a first step an empirical analysis of the current prevalence of the doctorate among

management board members (members of the “Vorstand”) and supervisory board

members (members of the “Aufsichtsrat”) of firms listed in the DAX-30 is presented. In

a second step, event study methodology (Binder, 1998; Gerpott, 2009; Schmid & Dauth,

2014) is employed to gauge investors’ reaction to the appointment of top managers

holding a doctoral degree. Manuscript 1 connects to and advances extant top

management literature on executive educational experiences and credentials (see section

2.2).

16

Manuscript 2 (“International work experience as a determinant of CFOs’ compensation

levels: Evidence from Europe”) examines the relationship between CFOs’ international

work experience and their compensation. In practitioner literature it is frequently stated

that in multinational companies (MNCs), CFOs with international work experience are

better equipped to deal with the challenges stemming from internationalization

(Ernst&Young, 2013; FinancialExecutive, 2012; Groysberg et al., 2011; Johnson, 2015;

Michael Page International, 2012). Consequently, CFOs’ international work experience

should be reflected in increased compensation. However, so far there is little empirical

evidence for the popular claim that international work experience pays off for CFOs.

The manuscript aims to establish the relationship between CFOs’ international work

experience and their compensation, based on a sample of CFOs of the largest firms in

Europe. More specifically, it is argued that international work experience has not only

beneficial but also detrimental effects: while a CFO develops valuable knowledge,

skills, and abilities during the time working abroad, his or her social network ties in the

organization’s home country are weakened. Furthermore, the manuscript investigates

whether the relationship between CFOs’ international work experience and their

compensation is contingent on the CEOs’ level of international work experience.

Overall, the manuscript extends previous literature on executives’ international

experience (see section 2.2) and executive compensation (see section 2.3).

Manuscript 3 (“Americanization and CEO pay in Europe: The moderating role of CEO

power”) analyses the relationship between Americanization and CEO compensation in

Europe. Furthermore, it explores how this relationship is moderated by CEO power.

While CEO pay has been rising considerably in many parts of the world (see section

2.3), there remain large differences between countries. In particular, the US stands out

as the country where CEOs receive much higher compensation than CEOs in other

17

countries (Cheffins & Thomas, 2004; Gerakos et al., 2013; McCall & Percheski, 2010;

Murphy, 1999). This gap in CEO pay is illustrated in a study by Conyon and Murphy

(2000) who show that in 1997, the CEOs of the 500 largest companies in the United

Kingdom in aggregate received 330 million GBP (660,000 GBP each), whereas the

CEOs of the top 500 US companies in aggregate made 3.2 billion GBP (6.3 million

GBP each).5 Besides the overall high level of pay, a second distinguishing feature of

US-style CEO compensation concerns the structure of the compensation packages. For

US CEOs, salary, i.e. the fixed component in compensation packages, makes up only a

relatively small proportion of total compensation; instead, variable components play a

much more important role (Murphy, 1999; Cheffins, 2003). It has been stated both in

academic and in practitioner literature that “American-style pay moves abroad”

(Johnston, 1998), i.e. that CEO compensation practices common in the US might be

adopted by firms in other parts of the world, for example in Europe (Cheffins, 2003;

Fiss & Zajac, 2004; Zattoni & Minichilli, 2009). As an article in the New York Times

put it: “Along with hip-hop and Hollywood movies, Europeans are eagerly importing

another American phenomenon: soaring pay packages for chief executives” (Fabrikant,

2006). However, firms differ in their readiness to adopt US compensation practices

(Bruce et al., 2005; Chizema, 2010; Sanders & Tuschke, 2007). Prior literature suggests

that Americanization, i.e. exposure to the US institutional environment, might be an

important factor driving the adoption of US-style CEO pay (Chizema, 2010; Fernandes

et al., 2013; Oxelheim & Randøy, 2005; Sanders & Tuschke, 2007). Hence, using a

sample of CEOs of the largest firms in Europe, the manuscript sets out to explore the

association between various dimensions of Americanization and the level of CEO

5 The differences in CEO pay levels between the top 500 companies in the US and in the United Kingdom

can in part be explained by factors such as company size and industry, which systematically differ

between the two countries (Conyon & Murphy, 2000; Fernandes et al., 2013).

18

compensation. More specifically, Americanization of the CEO, of the firm and of the

industry are examined. In addition, it is investigated whether CEO power plays a

moderating role in the Americanization – CEO compensation relationship. The

manuscript is grounded in executive compensation literature (see section 2.3), shedding

more light on the drivers of CEO compensation levels in Europe. Moreover, the

manuscript furthers knowledge on executive characteristics (see section 2.2) by

explaining effects of Americanization of the CEO and CEO power on compensation

levels.

3.2. Fundamental aims and assumptions

Research in social science can be conceptualized as following five fundamental aims in

order to create novel insights: understanding, description, explanation, prediction, and

design (Brühl, 2015; Kornmeier, 2007).6 The research manuscripts comprised in this

thesis primarily aim at explanation, i.e. identifying cause and effect relationships.

However, it is important to note that “no social science research can prove causality”

(Carpenter et al., 2001, p. 499). In this regard, cause and effect relationships uncovered

in the research manuscripts should be seen as regularities between the elements of the

study, not as universal laws which are common in the natural sciences (Brühl, 2015;

Kirsch et al., 2007; Schmid & Oesterle, 2009). In manuscript 1, the examined

relationship is between the doctorate of a newly appointed top manager and the stock

market reaction at the time of the appointment. Manuscript 2 aims at explaining the

association between CFOs’ international work experience and the level of compensation

they receive. A deeper understanding is developed by exploring how this association is

affected by the CEOs’ international work experience. Finally, manuscript 3 focuses on

6 Besides these “cognitive aims”, researchers are likely to be also guided by personal aims, for example

striving for prestige, power, or income (Brühl, 2015).

19

the potential effect of various dimensions of Americanization on CEO pay, and on the

role of CEO power which might magnify this effect. In all manuscripts, hypotheses

about the proposed relationships are formulated based on arguments derived from

appropriate theoretical perspectives (see section 3.3). Besides explanation, manuscript 1

also follows the aim of description, presenting a detailed picture of the rate of doctoral

degree holders among the top managers of the DAX-30 companies.

In order to outline the fundamental assumptions underlying this thesis, the research

approach taken in the manuscripts will be located in the four paradigms developed by

Burrell and Morgan (1979). These paradigms are defined by two dimensions: the

subjective-objective dimension and the regulation-radical change dimension. Taken

together, the two dimensions yield a 2×2 matrix comprising four research paradigms

(see Figure 1).

The subjective-objective dimension is concerned with assumptions about the nature of

science. More specifically, there are four sets of assumptions concerning ontology,

epistemology, human nature, and methodology. Two extreme positions can be

identified. First, the objectivist approach, which is characterized by: a realist position on

ontology (assumption: “reality” is of an objective nature), a positivist approach to

epistemology (assumption: knowledge is something that can be acquired), a determinist

view on human nature (assumption: individuals’ activities are determined by the

environment), and a nomothetic approach to methodology (use of quantitative data

analysis). Second, the subjectivist approach, which is based upon a nominalist position

on ontology (assumption: “reality” is the product of individual cognition), an anti-

positivist stance on epistemology (assumption: knowledge is something that has to be

experienced), a voluntarist view on human nature (assumption: individuals are

20

autonomous in their activities), and an ideographic approach to methodology (use of in-

depth qualitative analysis) (Burrell & Morgan, 1979; Deetz, 1996; Gioia & Pitre, 1990).

The regulation-radical change dimension focuses on assumptions about the nature of

society. The two contrasting extreme points concerning this dimension are: first, the

sociology of regulation, which is concerned with the status quo, unity, and cohesiveness

of society; second, the sociology of radical change, which is interested in aspects of

radical change and conflict (Burrell & Morgan, 1979).

Regarding the subjective-objective dimension, the three research manuscripts follow an

objectivist approach. This is most clearly reflected in the choice of nomothetic

methodology, as all three manuscripts employ quantitative techniques of data analysis,

examining relationships and regularities between the elements of interest. Concerning

the regulation-radical change dimension, the three manuscripts can be seen as rooted in

the sociology of regulation, given that the manuscripts are concerned with explanations

of the status quo, without emphasizing aspects of radical change. Considering the two

dimensions together, the research approach taken in the manuscripts can be located in

the functionalist paradigm (Burrell & Morgan, 1979). Thus, the research presented in

this thesis follows the predominant paradigm in organizational research and

international management research (Acedo & Casillas, 2005; Gioia & Pitre, 1990;

Kutschker & Schmid, 2011; Schmid & Oesterle, 2009).

21

Figure 1: Burrell and Morgan’s (1979) four paradigms

Source: Burrell & Morgan, 1979, p. 22.

3.3. Theoretical perspectives

The three research manuscripts of this thesis are based on the fundamental tenets of the

upper echelons perspective. The manuscripts share the underlying assumption that top

managers (and, more specifically, their experiences and psychological properties) have

an impact on strategic choices and, ultimately, organizational performance.

Furthermore, the manuscripts are based on the understanding that top managers’

demographic characteristics function as valid proxies for underlying and more elusive

constructs such as cognitions and values (Finkelstein et al., 2009; Hambrick, 2007;

Hambrick & Mason, 1984).

While grounded in the upper echelons perspective, each manuscript employs additional

theoretical perspectives in order to develop appropriate conceptual logics that explain

the investigated relationships. Manuscript 1 draws on human capital theory (Becker,

1975; Mackey et al., 2014) and on signalling theory (Spence, 1973, 2002) to provide

Radical

humanist

Interpretive Functionalist

Radical

structuralist

The sociology of radical change

The sociology of regulation

Subjective Objective

22

explanations for why the doctorate is relevant for top managers. From a human capital

perspective, the doctorate matters for the knowledge, skills, abilities, and other

characteristics that a top manager has developed during the time of his or her doctoral

studies (Falk & Küpper, 2013; Heineck & Matthes, 2012; Oechsler et al., 2008). Thus,

the top manager’s human capital is enhanced which could improve his or her job

performance. However, signalling theory provides another explanation for the relevance

of the doctorate for top managers. According to this perspective, the doctorate can be

interpreted as a signal for general ability. Because the level of ability of an individual is

not readily observable, employers rely on certain indicators that signal such ability.

Educational credentials can be such indicators, as higher education can be considered as

a filter system that sorts individuals depending on their abilities (Arrow, 1973; Franck

& Opitz, 2007; Hyclak et al., 2013). It is particularly in Germany that the doctorate

might function as an important educational credential that signals a high level of ability.

The German higher education landscape is characterised by a rather egalitarian structure

compared to many other countries which have a clearly defined segment of elite

institutions (Hartmann, 2001, 2009). Therefore, ambitious students might pursue a

doctorate to signal high levels of ability (Franck & Opitz, 2007; Opitz, 2005a; Oechsler

et al., 2008). In the manuscript, both human capital and signalling theory are employed,

because both the knowledge and skills acquired during doctoral studies as well as the

doctorate’s signal for general ability might be relevant in the context of the study.

Manuscript 2 also uses human capital theory, as it provides a compelling logic to

explain the benefits that an individual gains from international work experience. CFOs

who have worked abroad are likely to have developed knowledge and skills, such as a

thorough understanding of foreign customer needs, business practices, and legal

systems (Ramaswami et al., 2016; Sambharya, 1996; Schmid et al., 2015). Since such

23

knowledge and skills allow CFOs to better deal with the international challenges arising

in MNCs, CFOs’ international work experience might be valued by the firm, which in

turn should be reflected in higher compensation (Carpenter et al., 2001; Peng et al.,

2015; Schmid & Wurster, 2016). However, experiences not only shape an executive’s

knowledge and skills but also his or her social networks, which can also have an

influence on job performance and compensation (Engelberg et al., 2013; Geletkanycz &

Hambrick, 1997; Geletkanycz et al., 2001; Haynes & Hillman, 2010). Thus, the

manuscript integrates social capital theory (Adler & Kwon, 2002; Kwon & Adler, 2014)

to account for the effects of international work experience on CFOs’ social networks.

Combining human capital and social capital perspectives, both the upside and the

downside of international work experience for executives are incorporated into the

conceptual model.

Manuscript 3 primarily draws on neo-institutional theory to develop an understanding of

how Americanization affects CEO pay in Europe. This theoretical perspective focuses

on an organization’s embeddedness into its institutional environment (DiMaggio &

Powell, 1983, 1991; Meyer & Rowan, 1977; Scott, 2014; Zucker, 1987). Organizational

success and survival are presumed to depend on conformity with the demands of the

institutional environment. More specifically, organizations are confronted with

assumptions and values of what constitutes appropriate organizational behaviour and

practices (Meyer & Rowan, 1977; Thornton, 2004). The adoption of organizational

practices is conceptualized as a result of coercive, normative, and mimetic isomorphic

pressures that organizations are subject to (Chizema, 2010; DiMaggio & Powell, 1983,

1991; Judge et al., 2010). Because MNCs, by their very nature, span national

boundaries, they are embedded in and exposed to various institutional environments

(Kostova et al., 2008; Marano & Kostova, 2016; Saka-Helmhout et al., 2016). Hence,

24

MNCs might be pressured to incorporate organizational practices from institutional

environments other than their home environment (Kostova & Zaheer, 1999; Marano &

Kostova, 2016; Sanders & Tuschke, 2007). In the context of manuscript 3, this means

that various dimensions of Americanization, understood as exposure to the US

institutional environment, might compel European firms to adopt US-style CEO

compensation practices. It should be noted that in large parts of previous research based

on neo-institutional theory, the role of top managers has been relegated or not addressed

(Kraatz & Moore, 2002; Sanders & Tuschke, 2007). However, recent theoretical and

empirical neo-institutional works have emphasized the crucial role of executives in

organizational change and practice adoption processes (Geng et al., 2016; Greenwood &

Hinings, 1996; Sanders & Tuschke, 2007; Scott, 2014; Young et al., 2008). Following

this rationale and considering prior literature highlighting the importance of power

relations among corporate governance actors in the adoption of practices (Aguilera &

Jackson, 2010; Chizema, 2010; Greenwood & Hinings, 1996; Krenn, 2016; Westphal &

Zajac, 1994), the neo-institutional perspective is combined with managerial power

theory. At its core, managerial power theory suggests that CEOs who have power vis-à-

vis the board can influence the amount and composition of their own compensation

(Abernethy et al., 2015; Bebchuk & Fried, 2004; Bebchuk et al., 2002; Morse et al.,

2011; Van Essen et al., 2015). On this basis, we suggest that powerful CEOs can

leverage the exposure to a foreign institutional environment to increase their

compensation.

3.4. Data collection and data basis

In manuscript 1, the initial sample consisted of all members of the management boards

and supervisory boards of the DAX-30 firms. The initial samples of manuscript 2 and

25

manuscript 3 are both based on the 500 largest firms in terms of market capitalization in

Europe, with manuscript 2 analysing the CFOs and manuscript 3 examining the CEOs

of these firms.7 Firm- and industry-level data (for example: sales, firm performance,

ownership, leverage, etc.) were collected from firms’ annual reports and the two

databases Standard&Poor’s Capital IQ and Thomson Reuters Datastream. Individual-

level data comprised a range of information on the education and the career path of top

managers (for instance: nationality, number of years and location of international

education and work experience, tenure in current position, MBA title, doctorate, etc.).

Such data were hand-collected from top managers’ CVs or similar biographic

documents, using a variety of sources in order to achieve the best possible data

completion rate. In order to ensure validity of the data, a hierarchical data collection

procedure was applied (Georgakakis et al., 2016; Greve et al., 2009): first, data were

collected from annual reports and company websites. Second, for data that could not be

collected in the first step, biographical databases (e.g. BoardEx, Who’s who,

Standard&Poor’s Capital IQ) were used. Third, in cases where there was still

information missing, investor relations departments or top managers/top managers’

offices were contacted directly. Thus, the hierarchical data collection procedure ensured

that individual-level data primarily came from annual reports and company websites,

which can be considered reliable sources provided by the firm itself (Greve et al., 2015;

Van Veen & Marsman, 2008). By using information on top managers’ demographic

characteristics drawn from secondary sources, we follow the common and

recommended approach in upper echelons research (Finkelstein et al., 2009; Hermann

& Datta, 2005; Nielsen, 2010).

7 The 500 largest firms by market capitalization in Europe were identified from the Financial Times 500

Europe list, a ranking published annually by the Financial Times (Financial Times, 2016).

26

4. Research manuscripts

4.1. Research manuscript 1

Title: Der Doktortitel von Top-Managern der DAX-30-Unternehmen

Authors: Stefan Schmid, Frederic Altfeld, Tobias Dauth

Status: Revise and resubmit (Zeitschrift für betriebswirtschaftliche

Forschung)

Journal ranking: B (VHB-JOURQUAL 3)

Manuscript available from the author upon request.

27

4.2. Research manuscript 2

Title: International work experience as a determinant of CFOs’

compensation levels: Evidence from Europe

Authors: Stefan Schmid, Frederic Altfeld

Status: Revise and resubmit (European Management Journal)

Journal ranking: B (VHB-JOURQUAL 3)

Manuscript available from the author upon request.

28

4.3. Research manuscript 3

Title: Americanization and CEO pay in Europe: The moderating role of

CEO power

Authors: Stefan Schmid, Frederic Altfeld, Tobias Dauth

Status: Conditionally accepted (Journal of World Business)

Journal ranking: B (VHB-JOURQUAL 3)

Manuscript available from the author upon request.

29

5. Conclusion

5.1. Contributions

This thesis makes several contributions to top management research, more specifically

to research on executive characteristics and executive compensation. In the following

sections, the contributions of the individual manuscripts are elaborated.8

5.1.1. Contributions of manuscript 1

Manuscript 1 provides novel insights about an executive characteristic prevalent among

top managers in German speaking countries: the doctorate. Prior studies investigating

the implications of having top managers with particular educational backgrounds

usually focused on executives of US firms (e.g. Bertrand & Schoar, 2003; Datta &

Iskandar-Datta, 2014; Gomulya & Boeker, 2014; Hambrick et al., 1992; Nguyen et al.,

2015). Naturally, these studies were interested in educational characteristics relevant for

top managers in the US context, such as MBA degrees or elite education from Ivy

League universities. Manuscript 1 sheds light on the doctorate as an educational

characteristic which is relevant specifically for top managers in German speaking

countries and which, therefore, has received relatively little attention in prior top

management research. Based on an examination of the DAX-30 firms, the study finds

that 45% of the top managers have a doctorate, with the rate being higher for members

of the supervisory board (47%) than for members of the management board (42%).

Interestingly, in both boards the chairmen are more likely to hold a doctoral degree than

the other board members: in the management boards, 58% of the

CEOs/“Vorstandsvorsitzende” have a doctorate, compared to 39% of regular members.

8 More detailed elaborations on the contributions can be found in the respective research manuscripts.

30

In the supervisory boards, chairmen/“Aufsichtsratsvorsitzende” show a 62% rate of

doctoral degree holders, whereas for other members of this board the rate is at 45%.

Furthermore, it is found that the share of top managers with doctoral degree varies

greatly by industry, from 24% in the financial services industry to 58% in the

pharmaceutical industry. Finally, the study also shows that the rate of doctoral degree

holders is higher among older top managers than among younger top managers. This

stands in contrast to the MBA title, which is found more frequently among younger as

compared to older top managers. In sum, manuscript 1 provides an up-to-date picture of

the relevance of the doctorate for top managers, showing that this educational credential

is still quite prevalent among top managers of large German companies.

However, in our event study we could not find support for the idea that the appointment

of top managers with a doctorate generally results in more positive reactions from the

stock market. Only under certain conditions (i.e. depending on the field of study in

which the doctorate was obtained and on the industry in which the firm operates) does

the doctorate of a top manager make a difference in the evaluations of stock market

investors. Results of more detailed analyses show a positive market reaction only when

a top manager with a doctorate from the fields of engineering or natural sciences is

appointed to a company of the manufacturing sector. One interpretation of this finding

is that in these companies, in which technology as well as research and development

processes are of great importance, the knowledge and skills associated with a doctorate

from the fields of engineering or natural sciences might be particularly valuable. This

conclusion lends credence to the view that in German companies of the manufacturing

sector, high value is attached to the technical expertise of employees, including top

managers (Davoine & Ravasi, 2013; Lane, 1989; Mayer & Whittington, 1999).

31

Overall, the results of the event study do not provide evidence for a generally positive

effect of the doctorate and, therefore, little explanation for why the share of top

managers with a doctoral degree is generally quite high. As our descriptive analysis has

shown, even in industries where this share is lowest, nearly one in four top managers

hold such a degree. To propose an additional explanation for the prevalence of the

doctorate in the upper echelons of German companies, we draw on social psychological

approaches. The “similarity-attraction paradigm” (Berscheid & Walster, 1978; Byrne,

1971; Duck & Barnes, 1992; Nielsen, 2009; Schmid & Dauth, 2012) provides a

compelling rationale in this regard, suggesting that top managers with a doctorate are

more likely to reach the board level because of homosocial reproduction (Domhoff,

2002; Kanter, 1977; Useem & Karabel, 1986). More specifically, given that the

doctorate is highly prevalent among executives at the top level of firms, similarity

attraction biases should make current members of the top management team tend to

favour those candidates who share this characteristic (Boone et al., 2004; Westphal &

Fredrickson, 2001; Westphal & Stern, 2006; Zajac & Westphal, 1996). This bias could

be particularly salient in the upper echelons of the top firms in Germany (such as the

DAX-30 firms), considering that the corporate elite in Germany is often depicted as a

close-knit social network whose members share similar norms, values, and social

backgrounds (Hartmann, 2001; Kengelbach & Roos, 2006; Oehmichen et al., 2010;

Rickens, 2008; Schmid & Dauth, 2012).

5.1.2. Contributions of manuscript 2

Manuscript 2 adds to the literature by shedding light on a functional executive largely

neglected in prior research: the CFO. The bulk of research on executives and, even

more so, on executive compensation has examined either top management teams on an

32

aggregate level or CEOs (Menz, 2012; Uhde et al., 2017). There is a nascent research

stream on functional top managers which our manuscript extends (Menz, 2012). Prior

works in this field have examined C-suite executives such as the chief operating officer

(e.g. Hambrick & Cannella, 2004; Marcel, 2009), chief information officer (e.g. Preston

et al., 2008; Schobel & Denford, 2013), or chief strategy officer (e.g. Angwin et al.,

2009; Menz & Scheef, 2014). Although the CFO arguably is the second most important

executive in many firms (Six et al., 2013; Zorn, 2004), scholars have noted that there is

a dearth of knowledge about the individuals holding this position (Mian, 2001; Six et

al., 2013). In particular, as CFOs in MNCs are responsible for firms’ financials and

strategies that are highly international, Chua (2007, p. 491) asks the question of “[w]hat

are the skills required of a CFO in contemporary business as he/she traverses the globe

doing business in diverse cultural settings?” So far, only practitioner-oriented literature

has addressed this question, frequently recommending international work experience as

an essential characteristic of CFOs (Ernst&Young, 2010, 2013; FinancialExecutive,

2012; Johnson, 2015; Michael Page International, 2012).

Manuscript 2, which is anchored at the intersection of executive characteristics and

executive compensation literature, empirically investigates the effects of international

work experience for CFOs. Following the popular assertion that international work

experience is beneficial for CFOs would lead to the suggestion of a positive relationship

between CFOs’ international work experience and their compensation. However, we

take a more comprehensive view on the effects of international work experience by

drawing on findings from literature on international careers (Bolino, 2007; Dickmann &

Harris, 2005; Schmid & Wurster, 2017; Shaffer et al., 2012). More specifically, we

account for a downside that working abroad has for individuals, which is the separation

from social networks in the organization’s home country (Georgakakis et al., 2016;

33

Hamori & Koyuncu, 2011). Accordingly, an inverted U-shaped relationship between

international work experience and compensation is proposed and empirically supported,

leading to the conclusion that more international work experience is not always better.

This finding extends the current view on executives’ international work experience,

which focuses primarily on the benefits of such experience. This view is held not only

in practitioner-oriented literature but also in extant research on the relationship between

executives’ international work experience and their compensation (Carpenter et al.,

2001; Ernst&Young, 2010, 2013; FinancialExecutive, 2012; Johnson, 2015; Michael

Page International, 2012; Peng et al., 2015; Schmid & Wurster, 2016). A more nuanced

view on international work experience might have practical implications for the career

planning of individuals who aim to reach the CFO position: the extremes of attaining

very low or very high levels of international work experience should be avoided;

instead, a moderate level promises the largest pay-off in terms of compensation.

Moreover, in order to reduce the detrimental effects of working abroad, individuals

should engage in activities designed to keep their relationships with network contacts in

the organization’s home country intact.

Manuscript 2 generates additional insights by investigating CEOs’ international work

experience as an important boundary condition in the relationship between CFOs’

international work experience and their compensation. With this approach we follow a

recommendation of Finkelstein et al. (2009) who, after reviewing prior literature on

executive characteristics, call for the use of moderator variables to gain a more detailed

view on how and when executive characteristics have an impact. By considering CEOs’

characteristics as a contingency factor influencing how CFOs’ human and social capital

are evaluated and reflected in compensation, we acknowledge prior literature noting that

34

the “fit” between the CEO and CFO is crucial for a CFO’s job performance (Hambrick

& Cannella, 2004; Menz, 2012).

At the theoretical level, the combination of human capital and social capital

perspectives answers calls in the literature to employ several theoretical lenses in order

to explain the determinants of executive compensation (Finkelstein et al., 2009; Gomez-

Mejia & Wiseman, 1997). In executive compensation literature, there are various

studies that examine the effects of either executives’ human capital (e.g. Carpenter et

al., 2001; Finkelstein & Hambrick, 1989; Harris & Helfat, 1997) or social capital (e.g.

Engelberg et al., 2013; Geletkanycz et al., 2001) on their compensation. Rarely have

both forms of capital been considered in tandem, although their interdependent nature

has been acknowledged in the literature (Coleman, 1988; Haynes & Hillman, 2010;

Nahapiet & Ghoshal, 1998; Sundaramurthy et al., 2014). Therefore, manuscript 2

contributes to the field by providing an account of how an executive’s experience, in

this case international work experience, shapes not only the knowledge, skills, and

abilities (human capital) but also the network ties (social capital) of that executive. We

argue that it is important to consider both forms of capital when investigating the effects

of executive experiences on their compensation for two reasons: on the one hand, if an

experience increases both forms of capital, a stronger case for a positive impact of that

experience on compensation can be made. On the other hand, if an experience increases

an executive’s human capital while it decreases social capital, the association of that

experience with compensation might take more complex forms (such as an inverted U-

shaped form).

35

5.1.3. Contributions of manuscript 3

Manuscript 3 adds to our knowledge about determinants of CEO compensation levels in

Europe. Because of the prevailing focus on US companies in executive compensation

research, determinants of executive compensation that apply specifically to non-US

firms have received relatively little attention. However, as CEO pay levels in Europe

have increased over the years, there are concerns that European pay levels might

converge to US standards (Anonymous, 2008; Carter et al., 2009; Cheffins, 2003;

Murphy, 2005). Therefore, the factors that are associated with rising CEO pay levels in

Europe are of great interest not only for researchers and top managers but also for other

corporate governance actors and policymakers. Manuscript 3 offers insights on what

determines CEO pay levels in Europe by providing theoretical underpinning and

empirical evidence for the association between various dimensions of Americanization

and CEO pay levels.

Prior studies dealing with the influence of Americanization on executive compensation

in other countries have mostly examined the use of equity-based pay components (e.g.

Chizema, 2010; Fiss & Zajac, 2004; Geng et al., 2016; Melis et al., 2012; Sanders &

Tuschke, 2007), and not pay levels as does our study. Furthermore, by investigating

various dimensions of Americanization we extend prior research that has largely

focused on Americanization of the firm. We find that Americanization of the CEO, of

the firm, and of the industry is positively associated with CEO compensation levels in

European firms. Hence, we develop a novel and more comprehensive understanding of

Americanization and demonstrate its influence on CEO compensation.

More specifically, we confirm previous studies that have shown a positive relationship

between Americanization of the firm and CEO pay levels (Gerakos et al., 2013;

36

Fernandes et al., 2013; Oxelheim & Randøy, 2005). But beyond that, we highlight that

Americanization of the CEO and Americanization of the industry also have a positive

influence. The finding that Americanization at the individual level can impact the

adoption of pay practices from the US context resonates with the view that executives’

experiences and psychological properties shape their decision making (see section 2.2).

This is illustrated in the statement of a compensation consultant who said that many

European and Asian executives show a distaste for very large pay packages which is

“deeply rooted in their culture and views that you just don’t seek unlimited money”

(Johnston, 1998). In this regard, our study suggests that European CEOs who are

Americanized, for example because they spent parts of their education or professional

career in the US, might have less such restraints. Concerning Americanization of the

industry, our findings reveal that in industries dominated by firms from the US,

European firms are under pressure to keep up with their US counterparts and offer

higher compensation to their CEOs. This can be interpreted as a form of intra-industry

mimetic behaviour (Fligstein, 1985; Haveman, 1993; Lieberman & Asaba, 2006). A

practical example of this behaviour is presented in the case of SAP, a German software

firm which came under criticism for paying its CEO 15 million EUR as annual

compensation for 2016. However, Hasso Plattner, SAP’s chairman of the supervisory

board, justified the high pay pointing out that at competitors such as Oracle or

Salesforce, both from the US, CEOs receive around 40 million USD. He added: “The

compensation for our management board members needs to be internationally

competitive, considering our global competitors” (SpiegelOnline, 2017).9

Besides broadening the view on Americanization and the link to CEO pay, we also

present more in-depth insights about this link by delineating the moderating role of

9 Quotation translated by the author.

37

CEO power. Our argumentation is grounded in an innovative combination of neo-

institutional theory with managerial power theory, which answers calls in the literature

urging the use of several theoretical perspectives in order to develop compelling

explanations of executive pay determinants (Eisenhardt, 1988; Finkelstein et al., 2009;

Gomez-Mejia & Wiseman, 1997). Our approach accounts for the important aspect of

power relations among corporate governance actors in the adoption of novel (pay)

practices (Aguilera & Jackson, 2010; Greenwood & Hinings, 1996; Westphal & Zajac,

1994). The results of our study show that powerful CEOs are able to magnify the

positive effects that Americanization has on CEO pay levels. Thus, we shed light on

how powerful CEOs can take advantage of exposure to multiple institutional

environments so as to adopt organizational practices that are beneficial for them. This

finding also adds to the literature on managerial power theory. While this literature

provides robust evidence for a positive relationship between managerial power and

executive pay (Van Essen et al., 2015), the mechanisms behind this association are yet

to be appropriately explored. Our study shows that one such mechanism could be that

powerful CEOs are in a position to strengthen some of those forces that positively affect

CEO compensation levels.

5.2. Limitations and future research

This thesis has some limitations that need to be acknowledged. One limitation that

pertains to all three research manuscripts arises from the selection of samples. Each

manuscript is based on a specific sample comprised of top managers of firms that share

certain characteristics and are from certain geographic regions, which limits the

generalizability of the findings. As all manuscripts deal with top managers of large

listed companies, the findings of this thesis should not be uncritically generalized to

38

smaller firms or firms of different legal forms. Furthermore, as each sample used in the

manuscripts has a limited geographical scope, the results may not generalize to other

regions in the world. This issue is evident in manuscript 1, because the high percentage

of doctoral degree holders among top managers is a feature quite specific to German

speaking countries (Davoine & Ravasi, 2013; Franck & Opitz, 2004). The findings of

manuscript 2 should also be seen in the European context of the investigation, where

international work experience might be especially beneficial for CFOs, since

management in Europe involves a high degree of international and intercultural

challenges (Calori et al., 1995; Kaplan, 2014). Similarly, the effects of Americanization,

as described in manuscript 3, may not generalize to other parts of the world where

exposure to the US environment might play a less important role.

Another limitation that applies, to varying degrees, to all three research manuscripts

derives from the use of top managers’ demographic characteristics as proxies for

underlying constructs that are not directly measured. This approach, commonly used

and recommended in much of top management research (Carpenter et al., 2004;

Finkelstein et al., 2009; Hambrick & Mason, 1984; Pfeffer, 1983), has as its major

advantage that information on demographic characteristics are often readily available,

especially in the case of top managers of large and listed companies, and they can be

reliably measured. In contrast, psychological properties and other non-observable

characteristics of top managers are difficult to gauge (Finkelstein et al., 2009; Hermann

& Datta, 2005; Nielsen & Nielsen, 2011). Furthermore, given that top managers usually

are “unwilling to submit themselves to scholarly poking and probing” (Hambrick, 2007,

p. 337), the use of demographic characteristics provides a more viable approach to

achieve large sample sizes required for quantitative empirical analysis. However, the

main drawback of the demographics-based approach is that the assumed intervening

39

constructs and processes which are purported to link demographic characteristics with

outcomes usually remain unmeasured and untested – the so-called “black box” problem

(Dauth, 2012; Lawrence, 1997; Pettigrew, 1992; Priem et al., 1999). This problem is

well acknowledged in research relying on demographic characteristics and constitutes a

major limitation (Carpenter et al., 2004; Finkelstein et al., 2009). To bridge the gap

between demographic characteristics and outcomes, future research could draw on other

empirical designs that allow more direct examination and thick description of actors and

processes (Birkinshaw et al., 2011; Snow & Thomas, 1994). For example, in order to

supplement the findings of manuscript 1, further research could employ interviews with

investors to explore in more detail how they evaluate the doctoral degree of newly

appointed top managers. To substantiate and enrich the findings of manuscript 2 and

manuscript 3, future studies could use case studies that allow up-close observation of

compensation setting processes (Gibbert et al., 2008).

Besides the general limitations discussed above, each individual manuscript is subject to

some additional, specific limitations that also suggest future research opportunities.

Manuscript 1 investigates top managers of the DAX-30 firms, i.e. the 30 largest listed

firms in Germany. It would be an interesting avenue for further studies to investigate the

role of the doctorate of top managers in small and medium sized firms or in those firms

belonging to the Mittelstand. It can be supposed that in such firms the doctorate is less

important for top managers, considering that previous research has found that larger

firms are more likely to appoint top managers with doctoral degrees (Opitz, 2005b).

Moreover, the development of the relevance of the doctorate over time merits further

investigation, given many voices in the popular press claiming that the importance of

the doctorate for top managers is dwindling (Engeser, 2011; Löhr, 2014). In this

context, it could also be analysed if other educational credentials (e.g. MBA titles) or

40

certain career experiences (e.g. work experience abroad or in renowned management

consultancies) are becoming more relevant (Franck et al., 2004; Opitz; 2005b; Schmid

& Wurster, 2017). Time series analysis might be a promising research approach for

such an endeavour. Finally, manuscript 1 has limitations pertaining to the event study.

The stock market reactions to the appointment of a new top manager reflect investors’

anticipation of future performance implications. However, realized operating

performance is not measured (Gerpott & Jakopin, 2006; Lubatkin & Shrieves, 1986;

Oler et al., 2008; Schmid & Dauth, 2014). It could be a fruitful avenue for future

research to investigate the association between the doctorate of top managers and

realized firm performance (e.g. measured in terms of return on equity or return on

assets). The results of manuscript 1 suggest that the firm’s industry and the field in

which the doctorate was obtained might be important factors influencing this

association. Such an investigation would add to the literature on the relationship

between top managers’ characteristics and firm performance (Finkelstein et al., 2009;

Hiller & Beauchesne, 2014; Schrader, 1995), which, so far, has left the doctorate

unexplored.

Concerning manuscript 2, one limitation is that the analysis of contextual aspects

encompasses only the CEO. The study shows that the CEOs’ level of international work

experience has a moderating influence on the relationship between CFOs’ international

work experience and their compensation. However, the rest of the TMT is not

examined. It can be argued that it is not only the international work experience of the

CEO but of the whole TMT that plays a moderating role in the relationship between

CFOs’ international work experience and their compensation. By considering the entire

TMT, such an approach could yield stronger explanations than focusing only on the

CEO-CFO-duo (Hambrick, 2007). Thus, future works could investigate moderating

41

effects of TMT international work experience to generate further insights. Moreover, it

would be interesting to explore the effects of CFOs’ international work experience on

further outcomes at the individual level. While compensation might be one possible

measure for career success, other measures such as career progression, career stability,

or job satisfaction might also be influenced by international work experience. Finally, a

promising extension of the research focus of manuscript 2 would be to investigate the

impact of CFOs’ international experience on firm-level outcomes. Prior studies that

have examined the relationship between CFOs’ characteristics and outcomes at the firm

level have focused on characteristics such as gender, prior M&A experience, or

educational background (Aier et al., 2005; Huang & Kisgen, 2013; Uhde et al., 2017),

and on outcomes such as acquisitions performance, divestiture policies, or earnings

management (Krishnan et al., 2011; Six et al., 2013). Only recently have researchers

begun to explore the effects of CFOs’ international experience on outcomes at the firm

level. In this regard, Dauth et al. (2017) show that CFOs’ international education and

international work experience are positively associated with accounting quality. To add

to this literature, future studies could investigate the effect of CFOs’ international

experience on further financial or accounting outcomes, or on firm performance.

Manuscript 3 is limited in that effects of Americanization and CEO power on the

adoption and use of particular components of CEO compensation packages are not

examined. Manuscript 3 provides empirical evidence for a positive relationship between

Americanization and the total level of CEO compensation, and for a positive

moderating influence of CEO power. However, it remains unclear which pay

components account for the increase in total compensation levels. Further research

investigating the adoption and use of specific equity-linked compensation components

could yield important insights on how the increase in CEO compensation levels is

42

achieved. It is a distinctive feature of executive compensation in the US that equity-

linked compensation components make up a large part of overall compensation

(Cheffins, 2003; Fernandes et al., 2013). At the same time, equity-linked compensation,

such as stock options or restricted stock, has been blamed for the steep increase in

compensation levels in the US over the past decades (Anonymous, 2014; Frydman &

Jenter, 2010; Murphy, 2013). While prior research has found that Americanization is

related to the adoption of certain equity-linked components in European firms

(Chizema, 2010; Geng et al., 2016; Melis et al., 2012; Sanders & Tuschke, 2007),10

it

remains unexplored how CEO power shapes these adoption processes. Related previous

studies have shown that powerful CEOs are able to influence the adoption and

implementation of pay components to their own benefit (Abernethy et al., 2015; Fiss &

Zajac, 2004). On this basis, future works could examine if powerful CEOs can leverage

Americanization to adopt specific US-style pay components that increase their total

compensation.

Another limitation of manuscript 3 is that potential downsides of Americanization in

Europe are not analysed. However, our findings could inform future research in this

field. Our multi-dimensional conceptualization of Americanization could serve as a

basis for future studies that want to investigate how the different dimensions of

Americanization are related to undesirable consequences. Such consequences might be

a higher dismissal risk for CEOs in poorly performing firms, considering prior studies

that report a higher firm performance – CEO dismissal sensitivity in the US than in

Europe (Crossland & Chen, 2013; Oxelheim & Randøy, 2013). There might also be

downsides of Americanization for certain stakeholders of the firm. Ahmadjian and

10

In a related study, Schmid & Wurster (2016) have found that the structure of executive pay is

influenced by the internationalization of the supervisory board. More specifically, a higher

internationalization of the supervisory board is positively associated with the variable to fixed ratio of

executive pay.

43

Robbins (2005) and Ahmadjian and Robinson (2001) have shown that in Japan,

Americanization led to firm downsizing, i.e. decreases in the number of employees.

Hence, as Americanization is strongly associated with shareholder value orientation,

other stakeholders of the firm, such as employees, might be adversely affected. In this

context, further studies could investigate if the dimensions of Americanization outlined

in manuscript 3 can be related to such outcomes in Europe. Finally, future works could

examine a possible effect of Americanization on the pay gap between executives and

average workers of a firm, given that this gap is much larger in the US than in Europe

(Anonymous, 2016; Kiatpongsan & Norton, 2014; McCall, 2004). Larger pay

dispersion can have far-reaching implications not only for a firm (Bloom, 1999;

Connelly et al., 2016; Grund & Westergaard-Nielsen, 2008), but also for the society,

because a growing gap between top executive and average employee pay might increase

income inequality (McCall & Percheski, 2010; Morris & Western, 1999; Piketty, 2014;

Piketty & Saez, 2003, 2006). Thus, exploring the link between Americanization and pay

dispersion could be an important avenue for further research.

44

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