The effect of fairness preference on managerial entrenchment: an experimental analysis

Purpose - – The main purpose of this paper is to analyze the effect of fairness psychology on the motivation and behavior that drives managerial entrenchment. The paper also provides a theoretical basis to set up an effective incentive and restraining mechanism for corporations. Design/methodology/approach - – This paper conducts an experiment to investigate the effect of fairness preference on managerial entrenchment in enterprises. Findings - – The results of the experiment show that managers are very concerned about fair payoffs, i.e. the comparison of the principals’ earnings with managers’ market average levels of pay. The worse managers’ fairness preference becomes, the greater are the degrees of managerial entrenchment exhibited. In addition, a large payoff gap between managers and principals produces a higher sensitivity in high-ability managers, while a large payoff gap between managers and managers elsewhere in a market leads to a higher sensitivity in low-ability managers. Originality/value - – This paper provides new insights into incentives and constraints affecting the behaviors of managers at the corporate board level. Maintaining equity between managers’ payoffs, principals’ earnings and managers’ market average pay levels can restrain both the entrenchment behavior of managers caused by unfair psychology and also the increasing costs of staff switching jobs, thus producing greater profits for companies.