Religiosity and the Use of Performance-Based Compensation

Abstract

This study examines how a firm’s religious culture affects the structure of CEO compensation. I consider two characteristics of religious cultures that are likely to have implications on executive compensation structure – the sensitivity of economic agents to financial rewards (extrinsic motivation) and the extent to which agents’ actions can affect future outcomes (locus of control). I hypothesize that religious cultures’ attitudes toward both characteristics will lead to less use of performance-based compensation in religious cultures and show evidence consistent with the hypothesis. Further tests show that the relationship is primarily driven by religious cultures’ perception of extrinsic motivation. Using corporate headquarters relocations as a shock to a firm’s culture, I show that the relationship is causal