Organizational Size and CEO Compensation:The Moderating Effect of Diversification in Downscoping Organizations

The purpose of this study is to extend research devoted to the areas of organizational size and chief executive (CEO) compensation. The thrust of this investigation holds that diversification moderates the relationship between organizational size and CEO compensation. While research has consistently found a positive relationship between firm size and compensation, we utilize information-processing theory to more fully understand the relationship between size and pay. Information-processing theory suggests that compensation is based on the information processing required by CEOs. It is argued in this study that outcomes associated with downscoping, such as greater R&D or greater relatedness among business units, lead to greater information processing. As such, it is suggested that downscoping leads to increases in cash and total CEO compensation even as firms decrease size. Analysis of 60 downscoping firms supports these arguments.