Framing Effects of CEO Compensation Reference Point and Board Equity Pay on Product Diversification

Although agency research demonstrates that CEO pay levels can influence corporate product diversification, the literature has generated mixed findings. We contend that these inconsistent results may be attributable to earlier studies’ emphasis on CEO absolute pay level. However, relative pay may be more important as CEOs frequently compare their own pay with that of social peers within the industry. Yet it remains unclear whether the framing of CEO pay during the social comparison process exerts a significant impact on product diversification decisions. We build an integrated conceptual framework based on social comparison theory and the behavioral agency model that empirically tests product diversification in response to how CEOs frame their total pay relative to a social benchmark (i.e., the compensation reference point). We also establish theoretical boundary conditions of the baseline relationships by investigating the moderating influences of stock options and stock grants awarded to outside director...