Integrity, CEO Compensation, and Performance: Evidence from Public Enterprises in South Korea

Abstract

Purpose: The purpose of this paper is to analyze perceived integrity of public service users and public enterprise employees in association with public enterprise performance, and the role of the CEO compensation on the association between perceived integrity and public enterprise performance. Design/methodology/approach: This study uses publicly available performance evaluations and CEO compensation disclosures by the Ministry of Strategy and Finance (MOSF) in South Korea and integrity assessments by the Anti-Corruption & Civil Rights Commission of Korea from 2014 to 2017. Findings: We find a positive association between integrity and public enterprise performance, a result driven by the positive association between integrity perceived by service users and public enterprise performance. Furthermore, higher monetary compensation paid to CEOs has a negative influence on the relationship between integrity perceived by public service users and public enterprise performance, whereas higher compensation paid to CEOs has a positive influence on the relationship between integrity perceived by employees and public enterprise performance. Research limitation/implications: Integrity perception might be subject to bias depending on the type of stakeholders (public service users or public enterprise employees). Thus, information users of public enterprise performance reports need to be aware of perception gaps in relation to multi-faceted aspects of public enterprise performance. We provide insights into the relationship between perception of integrity and public enterprise performance of the government bodies who enact and administer laws and public policies. Originality/value: This paper captures how the perceptions of integrity, as assessed by diverse stakeholders with differing perspectives and levels of honesty and transparency, influence public enterprise performance assessments. Furthermore, it extends the findings of prior studies on the impact of monetary compensation in the public sector (see Abner et al. 2017; Boyd et al. 2018; Chen and Hsieh 2015, among others) to confirm how CEO monetary compensation impacts the relationship between integrity and public enterprise performance. In the public sector, the extrinsic motivation of higher CEO monetary compensation relative to other public enterprises generally crowds out prosocial motivation, which, in turn, impairs the relationship between external integrity and public enterprise performance. At the same time, higher CEO monetary compensation has an incremental impact on internal integrity in association with financial management performance. Thus, we suggest that public enterprises should pay close attention to the design of their current incentive systems for CEOs, place greater weight on prosocial motivation to manage external integrity, and emphasize skill-based monetary compensation to manage internal integrity. Lastly, using manually collected data sets of public enterprises provided by two independent government organizations in Korea, we increase the objectivity and generalizability of the findings of the few studies published on public service organizations in a single-country setting.