Contextual factors are typically neglected in both theorizing and empirical tests on
executive pay. The fast majority of empirical investigations use data from U.S. based
firms. Theoretical implications are typically developed, understood and tested on the
basis of the U.S. context. However, the U.S. case is not the world wide standard. Pay
in other countries is on average considerably lower and have a different pay mix. The
puzzle that from the typical use of agency theory can’t be explained is the variance of
pay practices that exist not only within countries but also across countries. This paper
extends scholars renewed attention to managerial power theory on executive pay. It
sets out how and why institutional theory must be included in explanations of
executive pay. On the basis of a sample of executive pay packages from 17 different
countries we test the theoretical extensions. Results indicate that institutions interact
with firm level determinants of executive pay. Explanations for executive pay should
therefore account for the variance of pay practices within and across countries.
Highlighting that the institutional embeddedness of pay practices play an important
role in finding conclusive explanations of current pay practices
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