Abstract

This paper theoretically and empirically evaluates the role of trust in business organizations by focusing on trustworthiness as it relates to the broader subject of compensation structure. To postulate the hiring of a trustworthy individual as a potential third solution to combat the commitment of moral hazard in the principal-fiduciary relationship, this study utilizes a two-stage operational model to assess the role that individual preference has on executive shirking levels. An OLS modeling technique is used to estimate the regression functions and coefficients for a cross-sectional sample of 110 manufacturing firms. Ultimately finding the trust model to be insignificant, results give little evidence to support the hypothesis that the characteristics of trustworthy individuals have any explanatory power over the difference between actual and predicted levels of incentive pay. Attributing this insignificance largely to the omission of variables due to lack of available data on executive biographical information, this study cautiously offers the hesitant finding that investment in social capital can potentially be utilized to hire an inherently trustworthy executive. As a secondary finding, the CEOs tenure with the company was found to be a significant determinant of the proportion of incentive pay, suggesting that greater focus should be placed on individual characteristics when setting executive compensation structure. In all, this study highlights the need for a more complete biographical database so further research can continue with a larger sample size and more efficient operational measures of trust.

Advisor

Sell, John

Department

Economics

Publication Date

2014

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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© Copyright 2014 Bailey E. Caffrey