MANAGERIAL COMPENSATION AND FIRM PERFORMANCE The Moderating Role of Firm Strategy as a Proxy of Managerial Discretion

This paper analyzes the effect of strategic context on managerial compensation design, and the interactive influence on firm performance for a set of Spanish companies. Specifically, this study examines the performance implications of the fit between different managerial compensation systems and diverse firm's strategic orientations-representing various levels of managerial discretion. Based on a framework combining agency theory and managerial discretion concept, a research design with both archival and survey data is used to test hypotheses in a sample of 82 firms. The findings offer sufficient confirmation of theoretical arguments, providing extensions of this research stream for non-U.S. firms. Results show that firms benefit from the design of managerial compensation systems when they match the managerial control and risk-bearing requirements imposed by the strategic context. Specifically, risk-encouraging compensation systems are better for prospector firms-high level of managerial discretion-whereas risk-discouraging compensation systems are better for defender firms-low level of managerial discretion.