Local community's social capital and CEO pay duration

Abstract

AbstractIn this study, we examine the impact of social capital surrounding firms’ headquarters on their chief executive officers (CEOs)’ pay duration, reflected by the vesting periods of the short‐term and long‐term components in their annual compensation. Our analysis reveals that CEO pay duration increases with the level of social capital in the county in which firms are headquartered. We further find that this effect is more pronounced when CEOs are more likely to be short‐term‐oriented, suggesting that under the influence of the local community's social capital, the board of directors uses longer pay duration to better align CEOs’ interests with long‐term shareholder value. Our results are robust to a variety of additional tests and a smaller sample of firms that had relocated their headquarters to communities with a different level of social capital. Overall, our findings are consistent with the view that social capital incentivizes firms to be long‐term‐oriented and refrain from short‐term opportunistic activities, and this lengthens CEO pay duration.