The impact of ISO 9000 on operating performance and senior executive compensation: An empirical analysis

ISO 9000 is the most popular meta-standard in management. By the end of 2005, the standard had been adopted by 776,608 companies or business divisions in 161 countries. ISO 9000 is now "a passport to the global business" and a basic requirement for many government tenders. Although ISO 9000 has been widely adopted in different industrial sectors, empirical studies disagree about its impact on the adopting firms' operating performance. Management researchers are increasingly turning to a social perspective, in particular institutional theory, to explain the diffusion of ISO 9000.;In this study we attempt to answer a few research questions related to the institutional and technical benefits of ISO 9000. We seek to find out whether ISO 9000 improves the organizational performance of adopting firms. Based on institutional theory and agency theory, we examine whether the CEOs and top executives of adopting firms are rewarded with higher compensation for ISO 9000 certification. We investigate if the early adopters obtain more technical benefits and senior executives in those firms enjoy higher compensation as a result of ISO 9000 certification. We used event study methodology to examine "abnormal changes" in operational performance, financial performance, and senior executive compensation in ISO 9000 certified firms. We matched individual ISO 9000 certified firms with a group of control firms based on the industry type (two-digit SIC code), firm size (total asset), and pre-event performance.;Our study contributes to the literature in several ways. We document the impact of ISO 9000 certification on senior executive compensation. We show that, although ISO 9000 has a significant positive impact on the operational and financial performance of the adopting firms, such benefits decrease dramatically among late adopters. Nevertheless, senior executives in both the early and late adopting firms are rewarded for ISO 9000 certification. We provide evidence that further explains the widespread diffusion of ISO 9000---firms adopt ISO 9000 not just for improving efficiency and gaining organizational legitimacy, but also for personal legitimacy that might lead to direct benefits for the firms' senior executives. We present a paradox in Operations Management and explain our findings from a social perspective grounded in institutional theory.