CEO Pay from a Social Norm Perspective: The Infringement and Reestablishment of Fairness Norms

Research Question/Issue
Social norm theory goes beyond economic efficiency arguments and provides a framework that allows for the subjective, judgmental, and socially interactive processes involved in the determination of CEO remuneration. Building on this theory, we argue that current CEO pay practices infringe a social norm. This norm states that a firm's wages ought to be fair. Thus, according to the social norm theory view, large inequalities between CEO pay and low-level incomes, as well as inequity concerns of CEO pay decoupled from performance, become a matter of public distress. If such publicly shared fairness norms become infringed, some amount of norm enforcement becomes likely, particularly when the punishment is of low cost. Norm enforcement also becomes likely if selective incentives and/or intrinsic norm enforcement are present to support punishing actions.

Research Findings/Insights
We test our model using a vignette-survey study and a representative sample of 800 Swiss citizens. We are able to show that individual differences - more precisely status attributes and moral development - drive perceptions of norm infringement. We demonstrate that the willingness to punish firms with norm-infringing CEO pay is high if low-cost punishment opportunities are provided, such as public votes on CEO pay regulation. In addition, the willingness to punish is also driven by feelings of deprivation which fuel intrinsic interest to punish norm infringers even at high individual costs.

Theoretical/Academic Implications
We adapt and contextualize social norm theory for the CEO pay debate. A model that explains how individual differences drive norm infringement perceptions, and how these differences lead to behavioral punishment intentions, is developed and tested empirically.

Practitioner/Policy Implications
The war for talent and the urge to offer incentives to CEOs impose costs on society, and firms are confronted with those costs. As a consequence, more and more people demand CEO pay regulation, which narrows firms' latitude. For firms, the evidence implies that they would be well advised to consider the climate of public opinion when determining executive pay. They may either reduce CEO pay or should communicate to the public why certain compensation designs may be favorable and in the interests of the enterprise and stakeholders. For politicians, the findings of our study show that there is a demand for CEO pay regulations and that this demand has to be acknowledged in some way in policy-making.