Exploring How Upper Echelons Adapt Strategies and Compensation Mechanisms within the High Discretionary Context

Drawing upon and extending the managerial discretion literature, we examine how top managers and board members behave in terms of adapting strategies and compensation mechanisms within the context of high-discretion that emanates from industry deregulation. We consider not only the increased opportunity to use discretion but also the inherent uncertainty arising from the availability of multiple options and risk of maladaptation, which we refer to as a discretion dilemma. Our longitudinal study examines the changes in the variance of strategies and compensation practices among banks and demonstrates the ways in which upper echelons manage the discretion dilemma. Our results demonstrate interesting reactions of both top managers and board members. Standard deviations of strategies among banks slightly decrease during the early part of the deregulation period examined but increase during the later part of the deregulation period. The results imply that top managers’ choices of strategies are not different from each other initially, but they gradually pursue their unique strategies. Meanwhile, standard deviations of compensation variables increase during the early part of the deregulation period but decrease during the later part of the deregulation period. The results suggest that bank boards explored unique governance mechanisms right after deregulation, but this exploration behavior decreased later. This finding demonstrates that boards function actively only in the presence of external shocks but typically not after the situation is stabilized. Additionally, it is important to note that the reaction pattern observed between top managers and board members is quite different. As previously indicated, board members pursued exploration first and then convergence in the governance adaptation process whereas it took top managers some time to start exploration.