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CAN HUMAN CAPITAL THEORY EXPLAIN CEO COMPENSATION?



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AN EMPIRICAL INVESTIGATION CAN HUMAN CAPITAL THEORY EXPLAIN CEO COMPENSATION LEON SCHJOEDT Doctoral Student University of Colorado at Boulder College of Business and Administration and Graduate School of Business Administration Department of Management Campus Box 419 Boulder Colorado 80309 0419 E mail Leon Schjoedt Colorado EDU ABSTRACT This cross sectional study found that Human Capital Theory explains CEO compensation across twenty industries but that Human Capital Theory s explanatory value varies from industry to industry The study was based on 1996 data from 594 CEOs in twenty industries that had more than two years tenure as CEO and who were not founders Firm size and performance were controlled for in the study Using Pearson correlations and stepwise regression analysis it was found that Human Capital Theory effects varied from industry to industry Also Human Capital Theory did not explain all variance which indicates a spurious relationship between human capital and CEO compensation AN EMPIRICAL INVESTIGATION CAN HUMAN CAPITAL THEORY EXPLAIN CEO COMPENSATION INTRODUCTION Much research on compensation has focused on performance and compensation for individuals especially for Chief Executive Officers CEO Zajac Westphal 1995 This is not without reason because the CEO may be the person that can impact the organizational performance the most as an individual Fama 1980 The CEO influences a variety of organizational aspects which in turn affect the organizational goals and performance e g choice of accounting methods Gomez Mejia Balkin 1992 Because the CEO s potential impact on the organization in a fundamental way the CEOfunction is unique to the organization This raises the question Does the uniqueness of the CEO function mean that the CEO is compensated differently than other organizational members If the CEO is compensated as other employees in the organization then the CEO compensation is based on theories such as Human Capital Theory Becker 1975 If on the



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