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Human Capital, Social Capital and Executive Compensation (Management Project)

Prior research has identified the manner in which human capital, social capital, and other intangible resources create value for organizations. Among such resources, those contributed by a firm’s top managers have been singled out as particularly important for the generation and preservation of competitive advantage. However, the costs incurred to gain access to these resources, which reside at the individual and relational levels rather than at the firm level, are rarely considered.

In this study, I focus on individual executives as the level of analysis instead of the traditional view of firms as unitary actors in order to study intra-organizational value appropriation. I focus on the most direct and economically significant form of value appropriation by top managers: executive compensation.

I introduce a theoretical framework linking executive compensation to executive-level intangible resources including human capital and social capital. I distinguish between generic and firm-specific forms of capital due to differences in the causal mechanisms linking each type of resource to compensation.

Generic resources convey market power and are directly appropriable by executives. Firm-specific resources have no value outside the firm and therefore do not convey market power, yet they will convey a different sort of power derived from familiarity, visibility, and legitimacy. Drawing on a sample of 71 executives from 36 publicly-traded US firms in high-technology industries, I provide empirical results that are broadly supportive of three of four hypotheses.

Executive compensation is found to be positively related to generic human capital (measured by the breadth of executives’ experience across multiple industries), generic social capital (external network size, external network range) and firm-specific social capital (the strength of intra-TMT ties, internal network size, criticality of internal ties, criticality of external ties).

I find no evidence linking executive compensation to firm-specific human capital. These results demonstrate the hazard of focusing on the value created by human capital and social capital without also considering the costs firms incur to access those resources.
Source: University of Maryland
Author: Di Gregorio, Dante Dominic

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