The Role of Power and Politics in the Repricing of Executive Options

[Timothy G. Pollock, Harald M. Fischer and  James B. Wade, (2002) The Role of Power and Politics in the Repricing of Executive Options, The Academy of Management Journal, 45 (6), 1172-1182]

This paper aims at developing a framework explaining why certain firms reprice options while others do not. The focus of the paper is to explore the moderating role of CEO’s power, the power of external stakeholders and the visibility of the firm and it’s CEO on the primary relationship between negative spread (difference between strike price of stock options and the market price) and the likelihood to reprice options.

Ownership sources of power resulting from concentration of stocks in the hands of both the institutional investors as well as the CEO results in reduced likelihood to reprice options. Institutional investors can mitigate the power of executives either directly or indirectly by virtue of their large shareholding and hence can keep a check on the self-serving behaviour of management. CEO who also owns shares of his company might not undertake activities that have the potential to raise organisational risk of a negative backlash from the shareholders subsequent to options repricing even when such acts may reduce individual risks.

However, the structural source of power enhances the ability of the CEO to engage in option repricing and hence mitigate their losses. CEO who is also the chairman of the company enjoys much greater power to reprice options. When there are barriers to hostile takeovers such that the market loses its effective corporate control and the management has no fear of being ousted, then its ability to engage in unpopular activities rises. His ability to nominate people on the board who are either his loyalist or are dependent on him for board seats can significantly enhance his ability to make these directors function in the interest of the CEO.

But, when the board of directors perceive that their actions to reprice options will be visible and discussed publically then their incentive to reprice options goes down. They are more concerned about impression management rather than serving the interests of the CEO so that they do not lose out on their credibility and legitimacy regarding other claims.

The paper has articulated how the struggle of power, whether its ownership power or structural power between the shareholders and management gets reflected in the decision of the company to reprice options. The party having more power tends to make a decision that is in its own self-interest. The study gives suggestions to use restricted stock awards in place of stock options that gives ownership to the CEO but at the same time preventing him from selling the stock for a stipulated period of time.

[submitted by Anisha, M Phil Scholar, 2017]

The roles of departmental and position power in job evaluation

[Welbourne, T. M., & Trevor, C. O. (2000). The Roles of Departmental and Position Power in Job    Evaluation. The Academy of Management Journal, Vol. 43, No. 4 , pp. 761-771]

Power may be defined as an ability to influence the decisions or outrightly control the behaviour of people. In organisations, it is nowadays used as a tool which can lead to positive or negative outcomes depending on how it is used. Such use of power to attain desirable outcomes gives rise to another term i.e. ‘politics’. Studies have shown that almost all the departments and processes are under the huge influence of organisational power and politics, and job evaluation process is no exception to that. Job evaluation may be defined as a process of systematic comparison between jobs to access their relative worth for the purpose of establishing a rational pay structure. The researcher, in this paper has attempted to test whether the job evaluation outcomes are affected by the departmental power in a university setting.

The researcher has successfully proposed a political perspective on job evaluation wherein it is believed that the job evaluation is based on the worth of a position and not on the worth of its incumbent, due to which the position holders use influence tactics in the job evaluation committees. This has made the researchers suggest that job evaluation procedures are not accurate and reliable because power and politics come in between and influence the job evaluation outcomes.

Further, the coalitional view or the political view of the organisation suggest that firms can be characterised as groups of subunits, each with its own agenda, which might or might not be consistent with organisational goals and thus this gives rise to the ‘departmental power’ which becomes an important determinant for resource allocation decisions. The literature suggests that more powerful departments are better at acquiring what they want and thus they have positive effect on favourable job evaluation outcomes. However, the researcher proposes that such positive effect will be greater when the position power of the jobs being evaluated or upgraded is high. Thus, the researcher posits that it is not only the departmental power but also the position power within the department that influence the job evaluation outcomes. Also, a clear distinction has been made between the position power and personal power wherein the position power signifies the incumbent’s ability to influence others through position held in an organisation’s hierarchy rather than through personal characteristics.

The results suggest that departmental power definitely affects resource allocation, however such effects become more substantial when the power associated with resource recipients is high. Also, the effects of departmental power on the number of new positions and position upgrades are greater when the position power associated with the jobs being evaluated is high. Thus, both departmental power and position power strongly influence the job evaluation outcomes. However with regard to politics in job evaluation, the researchers hold mixed views. While some researchers view this politics positively since it ultimately improves the department’s and firm’s performance, others contend that such job evaluation (under the influence of power and politics), does not accurately access the worth of the job.

[submitted by Mansi Babbar, Ph D Scholar, 2017]