Financial earnings at nonfinance firms raise executive bargaining power with boards.

Evidence

An increase in financial earnings for a nonfinance firm is often interpreted as a success of management in promoting shareholder value. Thus, it is likely to raise the top executives’ bargaining power. That top executives’ incomes are increasingly tied to short-term financial performance and that the stock market now values companies via an examination of returns on capital investment is well known. Compensation schedules for top executives, however, are determined by the boards of directors instead of stock market analysts. Thus, we suspect that, as financialization progresses at the firm level, corporate boards will be converted to the logic of financialization from the earlier logic of maximizing market share in determining CEOs’ and other top executives’ compensation. — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 56

Categorization

• QUESTION: The claim that boards, not markets, set executive pay — and that boards get ‘converted’ to financialization logic — invites follow-up on how board composition changes as firms financialize.
• XREF: connects to: Financial income reallocates resources away from workers and strengthens owner bargaining power; Fairness distributions reflect bargaining power, not just effort. — Nicolas Baumard, A mutualistic approach to morality: The…, 443; The $1 million deductibility cap unexpectedly inflated executive pay via options. — Gerald F. Davis & Suntae Kim, Financialization of the Economy, 55 (+1 more)

Related

• Shareholder-value incentive pay enriched managers more than shareholders themselves (similarity 0.81)
• Financial income reallocates resources away from workers and strengthens owner bargaining power (similarity 0.81)
• Firm financial income diverts resources from core production and shifts bargaining power upward (similarity 0.80)
• Financialization shifted corporate power from manufacturing and marketing executives toward financial executives. (similarity 0.79)
• Stock-based executive pay widened CEO-worker income gaps. (similarity 0.79)

Broader Connections

• Fairness distributions reflect bargaining power, not just effort. #expands (0.80) — Nicolas Baumard, A mutualistic approach to morality, 443