Business strategy and director compensation in liberal versus coordinated markets

In this study, we examined the association between business strategy and director compensation and whether this relationship differed between liberal market economies (LMEs) and coordinated market economies (CMEs). Using 27,309 firm-year observations from 16 countries for the 2002–2021 period, we found that differentiation was associated with higher director compensation, whereas cost leadership was associated with lower compensation. These relationships varied across institutional environments. Differentiation was positively associated with director compensation in LMEs but not in CMEs. Cost leadership was negatively associated with compensation in LMEs, but it was weakly and positively associated with compensation in CMEs. Additional analysis indicated that firms in LMEs are more likely to pursue differentiation and less likely to pursue cost leadership than firms in CMEs. The findings demonstrated that compensation arrangements are institutionally contingent and have implications for remuneration committees designing compensation policies to align with firms’ strategic orientations and national institutional environments.