Organizational Behavior Prof. Henry Tosi - University of Florida A Psychological and Sociological Explanation of Board of Director Behavior Is Economics Enough?

Organizational Behavior Prof. Henry Tosi - University of Florida Some Basic Premises A psychological/sociological theoretical explanation will enhance understanding of the relevant issues It is useful to refocus the issues toward the direction of the board/ equity holder relationship rather than the board/CEO relationship

Organizational Behavior Prof. Henry Tosi - University of Florida Financial Resourses Profit Products Prices Compensation Contribution Performance Compensation Pay /Support Contribution Raw Materials Costs The stakeholders Henry Tosi Owners Customers Top Management Middle Management Employees Suppliers Organizational Equilibrium

Organizational Behavior Prof. Henry Tosi - University of Florida The Economic Explanation AGENCY THEORY AND MANAGERIAL CAPITALISM

Organizational Behavior Prof. Henry Tosi - University of Florida Agency theory The firm is a "legal entity that serves as a nexus for a complex set of contracts (written and unwritten) among disparate individuals" (Jensen, 1983, p. 326; Spence & Zeckhauser, 1971; Ross, 1973). The agency relationship is "a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent" (Jensen & Meckling, 1976, p. 308). In the agency literature that focuses on the internal management of the firm, the typical view is that shareholders or the board of directors are principals, and top managers, more specifically the CEOs, are agents.

Organizational Behavior Prof. Henry Tosi - University of Florida Markets Owners Top Management Middle Management Employees Suppliers Henry Tosi Agency problems and governance issues are not relevant in the model in classical economics

Organizational Behavior Prof. Henry Tosi - University of Florida Owners Markets Top Management Middle Management Employees Suppliers Henry Tosi Corporate governance becomes a problem with the separation of ownership from control... The managerial capitalist position

Organizational Behavior Prof. Henry Tosi - University of Florida Board Customers Top Management Middle Management Employees Suppliers Principal Agent Henry Tosi Owners And the problem is not solved simply by the presence of a Board of Directors to represent owners, as articulated in agency theory, which is a way to focus on the relationship between the principal (owners) and the agent, usually the top management

Organizational Behavior Prof. Henry Tosi - University of Florida –A person who delegates to the agent the rights and power to act in his/her interests. In the large corporation, these are represented by the Board –Acts in the best interests of the principal – in theoretical models, the CEO and top management Henry Tosi The Principal The Agent

Organizational Behavior Prof. Henry Tosi - University of Florida Key Assumptions in Agency Theory Owners and managers are rational and self-utility maximizing with unlimited computation ability. Without rational self-utility maximizing managers, owners could easily establish convergence between their goals and those of the managers. The manager has private information that the owner cannot learn without costs, creating information asymmetry. If perfect information were freely available, there would be no agency problem since owners could simply monitor their managers (McGuire, 1988). The manager is work and risk averse, otherwise owners could just specify in the contract what managers need to do and assume that the managers will do it. If managers were not risk-averse, owners could just shift the risk to the managers, making payment completely dependent on the outcome.

Organizational Behavior Prof. Henry Tosi - University of Florida The development of alternatives The selection and ratification of alternatives The implementation of the choices The design of the monitoring structure - How to measure performance? - How to compensate performance? Henry Tosi Four key desicions in the organizational decision processes (Jensen and Meckling)

Organizational Behavior Prof. Henry Tosi - University of Florida Hidden Action –The principal is not able to observe the effort, the commitment or the work of the agent (Moral Hazard) The agent can act in inefficient ways and the principal cannot see or know Hidden Information –Information asymmetry. The agent knows something that the principal doesn’t know (Adverse Selection) E.g how resources entrusted to the agent are used. Henry Tosi The Bases of Principals’ (Board) Control Problems

Organizational Behavior Prof. Henry Tosi - University of Florida Board Customers Top Management Middle Management Employees Suppliers Principal Agent Henry Tosi Owners The ideal situation for the equity holders

Organizational Behavior Prof. Henry Tosi - University of Florida Board Customers Top Management Middle Management Employees Suppliers Principal Agent Henry Tosi Owners And the corporate governance problem

Organizational Behavior Prof. Henry Tosi - University of Florida The development of alternatives The selection and ratification of alternatives The implementation of the choices The design of the monitoring structure - How to measure performance? - How to compensate performance? But “shareholders retain approval rights on...board membership and the right to hire fire and set the compensation of top level executive” (Fama and Jensen, 1983) Henry Tosi In owner-controlled firms organizational decision processesare delegated to managment

Organizational Behavior Prof. Henry Tosi - University of Florida Methods of Controlling Agents Monitoring is the direct or indirect observation of the manager's action or behavior (Jensen & Meckling, 1976). Incentive alignment is rewarding agents for measurable results that are in the best interest of the owner. Thus, owners attempt to devise compensation systems to minimize agency problems by linking CEO pay to performance.

Organizational Behavior Prof. Henry Tosi - University of Florida Economic and Objective –Fiduciary responsibility to protect shareholder interest Provide continuity for the organization Acquire sufficient resources for the organizations operations –Informed reports to shareholders on the current condition of the company –Evaluate and compensate management in an impartial way Select and appoint CEO Psychological and subjective –Support for the CEO and company executives Pay similar to other executives on the board –Social network Industry categories and the Politics of the comparable firm in CEO compensation. By: Porac, Joseph F; Wade, James B.; Pollock, Timothy G.. Adminstrative Science Quarterly, Mar1999, Vol. 44 No. 1, p , 26. Written by Carter McNamara, MBA, PhD, Authenticity Consulting, LLC. Copyright Adapted from the Field Guide to Developing and Operating Your Nonprofit Board of Directors. What Boards Should Do – Roles and Responsibilities

Organizational Behavior Prof. Henry Tosi - University of Florida Nominating committee is formed –the current advisory board chair, immediate past chair, an at large member of the board, etc. (can vary per board) Candidates are nominated to the committee by either a top management team member and/or or a board member. A search firm may also be retained in order to locate qualified candidates. A slate of multiple candidates is prepared and distributed to the entire board membership and often the shareholders. Proxy Fight – shareholders can give authorization for a representative to vote for or against business proposals; the representative can use these votes to try and take over a company; the board can safeguard itself from such an attack and may do so against the best interest of the shareholders ( How Boards Are Elected

Organizational Behavior Prof. Henry Tosi - University of Florida In Return The Inducements for Board Members Economic and objective –Lucrative Board Salary ($139,000 – Median pay S&P 500 firms in 2004) Annual Retainer Fees Per Meeting Attendance Fee Stock Options Additional compensation for board chair and compensation and audit committee chair positions Source: Michael Brush, MSN Money, December 16, 2005 “Pay soars in the board room” –Minimal time commitment (meet approximately 6 times per year) –Directors & Officers Insurance Protects personal assets of director against lawsuits arising out of committed or allegedly committed wrongful acts while in the capacity of a corporate officer and/or director Source: "Directors' and Offficers Liability Insurance." Aon Corporation. 5 Jan –Examples of Additional Perks Private aircraft for travel to and from board meetings (3M Co.) Aircraft use and one-time award of $150,000 in restricted stock (Ceridian Corp.) Use of products at no personal cost (Toro Co.) 1 million donation to directors charity of choice upon his or her death (General Mills Inc.) Matching charitable donations (Medtronic Inc. ) Source: Werner, Michael. "Corporations get creative with board director perks." Mineapolis / St. Paul Business Journal 12 Jun Jan The Other Pathway to the Boardroom: Interpersonal Influence Behavior as a Substitute for Elite Credentials and Majority Status in Obtaining Board Appointments. By: Westphal, James D.; Stern, Ithai. Administrative Science Quarterly, Jun2006, Vol. 51 Issue 2, p

Organizational Behavior Prof. Henry Tosi - University of Florida In Return The Inducements for Board Members Most of the men and women sitting on boards do not necessarily need the money. There are intangible benefits to participating on boards as well… Psychological and subjective –Make a contribution –Learn something form the experience –Associate with interesting people –Privileged status associated with board position –Possible invitation to other board appointments –Social acceptance from corporate elite Werner, Michael. "Corporations get creative with board director perks." Mineapolis / St. Paul Business Journal 12 Jun Jan The Other Pathway to the Boardroom: Interpersonal Influence Behavior as a Substitute for Elite Credentials and Majority Status in Obtaining Board Appointments. By: Westphal, James D.; Stern, Ithai. Administrative Science Quarterly, Jun2006, Vol. 51 Issue 2, p

Organizational Behavior Prof. Henry Tosi - University of Florida Agency theory The firm is a "legal entity that serves as a nexus for a complex set of contracts (written and unwritten) among disparate individuals" (Jensen, 1983, p. 326; Spence & Zeckhauser, 1971; Ross, 1973). The agency relationship is "a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent" (Jensen & Meckling, 1976, p. 308). In the agency literature that focuses on the internal management of the firm, the typical view is that shareholders or the board of directors are principals, and top managers, more specifically the CEOs, are agents.

Organizational Behavior Prof. Henry Tosi - University of Florida Issues Emerge Due to How these Decisions are Allocated in the Contract The Perfectly Fashioned Contract The Relational Contract The Soft Contract The Psychological (Implicit) Contract

Organizational Behavior Prof. Henry Tosi - University of Florida The Perfectly Fashioned Complete Contract The perfectly fashioned complete contract would specify precisely what each party would do in every possible circumstance and arrange the distribution of realized costs and benefits of in each contingency so that each party finds it optimal to abide by the contract’s terms

Organizational Behavior Prof. Henry Tosi - University of Florida The Relational Contract The RELATIONAL CONTRACT outlines the parameters of the relationship by focusing on goals and objectives instead of specific actions, on the general nature of the relationship, the criteria to be used in decision making, who has the power to act and the boundaries of that action, and mechanisms for resolving differences between the parties. This pattern of agreeing on process and procedure rather than action is mirrored in corporate charters [that] specify such matters as the procedures for selecting directors and officers, and, in very broad terms, their powers. without consulting stockholders (Milgrom and Roberts, 1992)

Organizational Behavior Prof. Henry Tosi - University of Florida Soft Contracting Soft contracting, to be viable, needs to be supported by a more elaborate informal governance apparatus than is associated with hard contracting. Thus, whereas the latter relies heavily on legal and economic sanctions, the former rests much more on social controls. As compared with hard contracting, soft contracting appeals more to the spirit than to the letter of the agreement. (Williamson and Ouchi, 1978)

Organizational Behavior Prof. Henry Tosi - University of Florida The Psychological Contract The mutual agreement that emerges over time about the expectations that the organization has for the individual and the individual has for the organization

Organizational Behavior Prof. Henry Tosi - University of Florida Board Customers Top Management Middle Management Employees Suppliers Principal Agent Henry Tosi Owners What the corporate governance problem becomes – When managers control the firm

Organizational Behavior Prof. Henry Tosi - University of Florida The development of alternatives The selection and ratification of alternatives The implementation of the choices The design of the monitoring structure - How to measure performance? - How to compensate performance? Are made by the top management and it will be more influential than principals (read, Board) such that Boards deviate from there responibilities to stockholder. In this case we know..... In management-controlled firms the major Decisions for the firm

Organizational Behavior Prof. Henry Tosi - University of Florida THE EVIDENCE: MANAGERS OF MANAGEMENT CONTROLLED FIRMS ACT IN WAYS THAT SUBOTIMIZE THE INTERESTS OF EQUITY HOLDERS What happens when boards deviate from their responsibilities

Organizational Behavior Prof. Henry Tosi - University of Florida Results of Research 1. Managers may choose accounting methods which state results in ways more favorable to them than to stockholders 2. Managers may make investment decisions that are less optimal for owners, but which minimize managerial downside risk 3. Managers may undertake acquisitions and mergers that transfer higher agency costs to owners 4. Managers may use internal political strategies to block organizational control mechanisms intended to provide checks on managerial discretion. 5. Managers may use organization resources to insulate themselves from the disciplining effects of external markets.

Organizational Behavior Prof. Henry Tosi - University of Florida Results of Research (continued) 6. CEOs negotiate more favorable compensation contract ( less risk, higher pay, more board outsiders, make strategic choices, stronger use of compensaton consultants) 7. Managerial pay based more on firm size than performance 8. CEOs more likely to also be Board Chair 9. CEO performance evaluation less likely to be by anonymous evaluators 10. When performance is low, evaluation criteria are more qualitative ( leadership, citizenship, etc) than quantitative (ROI, ROE, etc)

Organizational Behavior Prof. Henry Tosi - University of Florida –Fiduciary responsibility to protect shareholder interest Provide continuity for the organization Acquire sufficient resources for the organizations operations –Informed reports to shareholders on the current condition of the company –Evaluate and compensate management in an impartial way Select and appoint CEO –Support for the CEO and company executives These effects, notwithstanding the roles and responsibilities of Directors, i.e.,

Organizational Behavior Prof. Henry Tosi - University of Florida Stable behavior patterns that make the Board an indentifiable and unique unit over time…. –The Structure of Norms and Expectations Ideas about how board members should behave, categorically, and applied to all in Board Roles –The Nature of Interpersonal Relationship Behavioral dispositions base on the specific interpersonal relationships –i.e., the personalities of the board members and the top management team An Alternative Perspective The Performance Structure

Organizational Behavior Prof. Henry Tosi - University of Florida When Top Management influence is Strong The Performance Structure of Boards Includes Behaviors that suboptimize owner interests, as Strategic manipulation of comparison groups in evaluation decisions CEO’s are not held accountable (dismissed) for poor firm performance (Boeker, 1992). Compensation based upon affiliations vs. firm performance (Fierman, 1990) Levels of diversification beyond the level at which shareholder wealth is maximized (Zajac & Westphal, 1996). CEO & Board more likely to participate in Greenmail Transactions (Kosnik, 1990).

Organizational Behavior Prof. Henry Tosi - University of Florida An explanation for this Role Theory and Role Taking of Board Members Role Senders Expectations Focal Person Received Role New Directors Interpersonal Factors The CEO Board of Directors Attributes of The Person Performance Structure

Organizational Behavior Prof. Henry Tosi - University of Florida Longitudinal study of workers who become supervisors and union stewards. When promoted, workers adopted attitudes similar to supervisor or stewards When moved back to their previous positions, attitudes changed to be similar to original attitudes How the Performance Structure is Learned The Lieberman Study(1956)

Organizational Behavior Prof. Henry Tosi - University of Florida Students were solicited to participate in a study that simulated a prison (with cells, bars, etc.,) in the Psychology building –They were randomly assigned to be guards or prisoners –Prisoners were “captured” and assigned a cell –Guards received no particular training, but told to act as guards. Results: Prisoners acted as prisoners, guards as guards. They became so extreme that the experiment was concluded early How the Performance Structure is Learned Stanford Prison Experiment (Zimbardo, 2007)

Organizational Behavior Prof. Henry Tosi - University of Florida Implications for Board Involvment We can expect members to adopt the general norms of board behavior – from both studies That these norms may be extended and modified in negative ways – from the Stanford Experiment – as in the case of Enron, when very competent and intelligent board members acted as they did

Organizational Behavior Prof. Henry Tosi - University of Florida The Source of Norms and Expectations on Role Taking of Board Members Role Senders Expectations Focal Person Received Role New Directors Interpersonal Factors The CEO Board of Directors Attributes of The Person Performance Structure Sources of norms and expectations Culture and Subculture Professional and educational organizations Law and law enforcement agencies Pressure groups Officials in the organization Emergent board member consensus etc

Organizational Behavior Prof. Henry Tosi - University of Florida The effect of the CEO and Top Management on the Role Taking of Board Members Role Senders Expectations Focal Person Received Role New Directors Interpersonal Factors The CEO Board of Directors Attributes of The Person Performance Structure Propensity of the CEO To Exercise Power Especially in the absence of large equity holders CEOs high in Power Motivation

Organizational Behavior Prof. Henry Tosi - University of Florida POWER ASYMMETRY – HOW IT EMERGES When the CEO is involved in board selection… –Board becomes extension of TMT not owners –Loose ties with equity shareholders and strong ties with the TMT –Board engages in self-preservation behavior with the CEO at the expense of shareholders

Organizational Behavior Prof. Henry Tosi - University of Florida Board becomes extension of TMT - not owners Who Gets Elected: Characteristics of Boards – Majority of outside directors are top managers of other large firms (Westphal & Stern, 2006) –High levels of demographic homogeneity, common social ties, shared attitudes, and compatible behavioral styles – resulting from attendance at same elite educational institutions, membership in exclusive clubs, and upper-class backgrounds.

Organizational Behavior Prof. Henry Tosi - University of Florida We know that in groups (boards) that there can be….. Social facilitation Social inhibition Social loafing Suggestibility Group Paralysis

Organizational Behavior Prof. Henry Tosi - University of Florida The Effect of Personal Attributes on the Role Taking of Board Members Role Senders Expectations Focal Person Received Role New Directors Interpersonal Factors The CEO Board of Directors Attributes of The Person Performance Structure OOutside directors are top managers of other large firms High levels of demographic homogeneity, common social ties, shared attitudes, and compatible behavioral styles

Organizational Behavior Prof. Henry Tosi - University of Florida Loose ties with equity shareholders and strong ties with the TMT Equity Holders Laws and Broad Social Norms Usually dispersed and not able to organize Top Management –Lucrative Compensation –Social Status Deriving from Membership –Sanctions if not supporting –Other Perks Consulting Use of Firm’s Facilities The effect is an imbalance in the dependency relationship

Organizational Behavior Prof. Henry Tosi - University of Florida The Received Nature of the Board Role as a function of Sent Pressures Role Senders Expectations Focal Person Received Role New Directors Interpersonal Factors The CEO Board of Directors Attributes of The Person Performance Structure Some Non Wealth Maximizing Behaviors Strategic manipulation of comparison groups in evaluation decisions CEO’s are not held accountable (dismissed) for poor firm performance Compensation based upon affiliations vs. firm performance Levels of diversification beyond the level at which shareholder wealth is maximized

Organizational Behavior Prof. Henry Tosi - University of Florida Board engages in self-preservation behavior with the CEO at the expense of shareholders, for example Strategic manipulation of comparison groups in evaluation decisions CEO’s are not held accountable (dismissed) for poor firm performance (Boeker, 1992). Compensation based upon affiliations vs. firm performance (Fierman, 1990) Levels of diversification beyond the level at which shareholder wealth is maximized (Zajac & Westphal, 1996). CEO & Board more likely to participate in Greenmail Transactions (Kosnik, 1990).

Organizational Behavior Prof. Henry Tosi - University of Florida The Received Nature of the Board Role as a function of Sent Pressures Role Senders Expectations Focal Person Received Role New Directors Interpersonal Factors The CEO Board of Directors Attributes of The Person Performance Structure These Norms are enforced by Law and regulatory agencies Organizational sanctions Sanctions by group members

Organizational Behavior Prof. Henry Tosi - University of Florida Board norms are enforced by.... Law and regulatory agencies Organizational sanctions Sanctions by group members

Organizational Behavior Prof. Henry Tosi - University of Florida Some conditions that simplify compliance Closer bonds with CEO rather than equity holders Ambiguity implicit in the Board behavior requirements Pressures within the Board itself Personal justification processes

Organizational Behavior Prof. Henry Tosi - University of Florida Some conditions that simplify compliance - Closer bonds with CEO rather than equity holders The Reciprocity Principal (Cialdini, 2001) We tend to feel reciprocally obligated to those who have provided favors, gifts or other benefits. Selection of board members heavily influenced by CEO and Top Management Team Compensation, status and perks of Board are very attractive The CEO as a power and prestige figure Studies show that there is very high compliance with authority figures (e.g., Milgram Obedience Studies

Organizational Behavior Prof. Henry Tosi - University of Florida Some conditions that simplify compliance Ambiguity implicit in the Board behavior requirements Social Proof – We view behavior as correct in a given situation to the degree that we see other performing it (Cialdini, 2001) –Shared views influence the entire community. Beliefs and judgments become anchored and reality becomes a consensual social construction. –Thus, the board as a whole influences the other member who is considering some other solution or action to the problem or issue at hand.

Organizational Behavior Prof. Henry Tosi - University of Florida Some conditions that simplify compliance Pressures within the Board itself Tendency to lie, cheat and steal –In groups, a stronger tendency to lie, cheat and steal than individuals (Erez et al, 2001) Commitment and consistency (Cialdini, 2001) –Once a stand is taken, there are personal and interpersonal pressures to remain consistent Group Polarization-Risky Shift –Typical group member takes more extreme position as a result of group discussion – one explanation = groupthink Groupthink

Organizational Behavior Prof. Henry Tosi - University of Florida Some conditions that simplify compliance Group think pressures within the Board itself Illusion of invulnerability Rationalization Sense of morality Pressure for conformity Self-censored Stereotyping Opposition Unanimity Mind Guards

Organizational Behavior Prof. Henry Tosi - University of Florida Groupthink Occurs …. Cohesion Insulation Directive leadership Important goals Stress

Organizational Behavior Prof. Henry Tosi - University of Florida Some conditions that simplify compliance Personal processes Ingratiation behavior and Liking Attribution theory

Organizational Behavior Prof. Henry Tosi - University of Florida Ingratiation helps invoke the liking principle (which states that an individual is more likely to grant requests from others they know and like), which then invokes the reciprocity rule. Liking for others is based upon: social similarity, physical attractiveness, compliments and flattery, contact and cooperation. Ingratiation

Organizational Behavior Prof. Henry Tosi - University of Florida Attribution Theory How people make attributions about cause/effect relationships…Or how they make causal attributions….. –that means…things are not what they seem….e.g. Stereotypes, Illusions….

Organizational Behavior Prof. Henry Tosi - University of Florida Attention and Recognition Processes Automatic Response - A cue triggers a particular stereotype –Can cause false memories and misevaluation Controlled Response - Different pieces of information are aggregated to form a judgment

Organizational Behavior Prof. Henry Tosi - University of Florida Some attribution tendencies Underestimate the effect of the environment The actor is responsible for acts leading to rewards Attributions follow affective relationships

Organizational Behavior Prof. Henry Tosi - University of Florida Some attribution tendencies (more) Attributions follow affect, for example Good OUTCOME Bad Like CEO Dislike CEO Environment Environment CEO

Organizational Behavior Prof. Henry Tosi - University of Florida Why This Is Important

Organizational Behavior Prof. Henry Tosi - University of Florida The Social Nature of Reality The social environment provides –Cues and stimuli –Information about how information should be evaluated –Information about how to assess information –Information about how to assess decisions

Organizational Behavior Prof. Henry Tosi - University of Florida Some conditions that simplify compliance and affect the social nature of reality Closer bonds with CEO rather than equity holders –Reciprocity –The CEO as a Power figure Ambiguity implicit in the Board behavior requirements –Social Proof Pressures within the Board itself –Tendency to lie, cheat and steal –Risky Shift –Commitment Personal justification processes –Liking –Attribution theory

Organizational Behavior Prof. Henry Tosi - University of Florida Perceptions are affected Perception –The organization and attribution of information – Information asymmetry is relevant here –Attribution of properties on the basis of information How good is the CEO? –Assessment of cause/effect relationships Did the CEO/Management cause the level of firm performance… or was it something else

Organizational Behavior Prof. Henry Tosi - University of Florida It is important to understand how the organizational culture is involved … The patterned ways of thinking, feeling and reacting that exist an an organization. It is a reflection of the Modal Personality of the Dominant Coalition –The modal personality is the degree of homogeneity and strength of a particular personality orientation in an organization. It stems from early socialization, selection, organizational socialization and promotion decisions in the firm The Dominant Coalition in the management controlled firm is the Top Management Team along with a supporting board of directors tosi13

Organizational Behavior Prof. Henry Tosi - University of Florida A Multilevel Model of Organization Culture Modes of Implementation Specific activities to interact with the environment and derived from secondary strategies Secondary Strategies Instrumental and expressive (technical)(social) Primary Strategy Basic Values ENVIRONMENT

Organizational Behavior Prof. Henry Tosi - University of Florida Manifestations of a Top Management Dominated Organizational Culture - I Organization Design, Structure and Policies that favor CEO control Selection and Socialization Strategies of Both Top Managers and Board Members Class Distinctions Between the Board, Equity Holders and Management Ideologies and Implicit Belief Strategies of the

Organizational Behavior Prof. Henry Tosi - University of Florida Manifestations of a Top Management Dominated Organizational Culture - II Ideologies and Implicit Belief Strategies of the Competence of Top Management Myths and Symbols in the Form of the Pay Structures that reflect Performance, but selectively Language which supports compensation and evaluation processes Rites and Ceremonials reflected in the board selection process and how equity holders are represented

Organizational Behavior Prof. Henry Tosi - University of Florida Implications for Human Resource Management Strategy and Policy CEO Pay is higher, though it may reflect “market conditions” selectively defined –The true amount may be masked by the nature of incentives, bonuses, long term pay and perks New CEOs can negotiate a contract with higher pay, lower pay risk, and strategic freedom Will be placed in more powerful position (i.e., board chair

Organizational Behavior Prof. Henry Tosi - University of Florida Implications for Human Resource Management Strategy and Policy Managerial pay based more on firm size than performance CEOs Less Likely to be evaluated by anonymous commitees CEOs less likely to be evaluated with hard criteria when firm performance is low, focus on leadership and managerial skills CEO pay model is mimicked within the firm –Higher pay and lower risk for both top management and the workers, in general

Organizational Behavior Prof. Henry Tosi - University of Florida Psychological and sociological approaches can amplify the implications, hypotheses and studies of the agency relationship –Alternative explanations, i.e, cohesiveness, other views of the contract, attribution theory and other group processes –Alternative Measures, i.e., surveys, network analysis –Alternative methods, i.e., laboratory studies And, at the same time, economic approaches can enlighten these approaches –More rigor –The use of modeling –The use of archival data Summary…..

Organizational Behavior Prof. Henry Tosi - University of Florida