Would “No More Counting Dollars Be Counting Stars”? CEO Compensation and Spatial-Temporal Cognition

Prior research on corporate governance has paid little attention to the cognitive consequences of compensation for CEOs. This paper studies how compensation affects the most basic aspect of cognition, i.e., spatial-temporal cognition of CEOs. Drawing from prior theory and research, it is argued that money reduces the relevance of spatial-temporal constraints on CEOs’ cognition of reality by increasing the sense of control over space-time. Further, this main effect reduces as CEO compensation becomes more contingent upon firm performance. Using a content-intensive sample of 713 CEO-year observations of public corporations, and through content-analysis and simultaneous equation modeling, the hypotheses are tested. The results provide support for the theory put forward in the present paper. The moderating effect somewhat but partially alter the main effect. Most interestingly, these findings point to a potential paradox in that compensation that is long believed to be essential for aligning the interests of CEOs with the owners’ interests, acts against such alignment by biasing CEOs’ cognitive representation of reality. The implications of the paper’s findings are discussed for the research on CEO compensation, CEO cognition, incentive alignment and diversification/merger/acquisition.