Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

New study: Why CEO pay matters

27.09.2006
Executive compensation scholars have released new, breakthrough research analyzing perceptions of fairness in executive pay and how CEO over- or underpayment cascades down to lower organizational levels.

The paper, “Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation,” looked at data from over 120 firms over a five-year period and is the most comprehensive study of its kind to be conducted. Authored by James B. Wade at Rutgers University, Charles A. O’Reilly, III at Stanford’s Graduate School of Business, and Timothy G. Pollock at Pennsylvania State University’s Smeal College of Business, it will be published in the September/October 2006 issue of Organization Science.

The techniques of Operations Research (O.R.), the discipline of applying advanced analytical methods to help make better decisions, drove the analysis that appears in the paper. Among the key findings:

CEO Overpayment Has Higher Costs Than Previously Realized:

Arguments have been made that even if a CEO is overpaid, a large company can easily absorb the cost. However, the researchers found that CEO pay has direct consequences for compensation at lower employee levels. That’s because the effects of CEO overpayment cascade – at diminishing degrees – down to subordinates. For example, based on their models, where one CEO was overpaid by 64 percent, individuals in his/her company at Level 2 (COO, CFO, etc.) were overpaid by 26 percent, while individuals at Level 5 (division general managers) were overpaid by 12 percent. The cumulative effect of this systemic overpayment impacts overall organizational performance and shareholder value. Professor Charles O’Reilly, a co-author at the Stanford Graduate School of Business, notes “Given the large sums paid to some senior executives, the total cost for overpayment could be a big number – and, in some cases, significantly affect shareholder returns.”

CEO Pay Impacts Subordinate Turnover:

The study found that CEOs serve as a key referent for employees in determining whether their own pay is fair. Simply put, if the CEO is overpaid, subordinates are more likely to leave. The “turnover effect” becomes more pronounced the farther away you get from the CEO level. It also appears that even if an employee is overpaid relative to the market, if their CEO is overpaid by a larger percentage than they are, they will have a greater propensity to leave. “CEO compensation impacts employee retention more than we realized,” says lead author James B. Wade at Rutgers University. “Our research found that CEO overpayment is related to turnover, which can have important long-term consequences. It is quite possible that those most likely to leave because of perceived unfairness are precisely those employees coming up in the organization that would eventually rise to the top management team (TMT) level.”

CEO Underpayment also Cascades:

The study found that CEO underpayment tends to get cascaded through an organization, with multiplying effects. The researchers also found that if the CEO is underpaid more than you are, you are less likely to leave, but if the CEO is underpaid less than you are, you are more likely to leave. As Professor Wade puts it, “Underpaying a CEO could reduce turnover if subordinates are underpaid less than the CEO is underpaid.”

Notions of Fairness are Powerful:

On a positive note, the study found that CEOs tend to be concerned with the perception of fairness. If the CEO is paid generously, he/she will typically use their influence to pay others generously as well. And, if they are seen as being underpaid, that will also have an effect. “Our research shows evidence that CEOs are concerned with fairness, and that they are likelier to share rewards than they are to share burdens,” says co-author Timothy Pollock of Penn State University. “But this can be expensive and has the potential to hurt a firm’s bench strength if the rewards aren’t fully shared.”

Powerful CEOs Pay Employees More:

Another interesting finding of the research is that more powerful CEOs (those who also serve as Chairman of the Board) tend to pay their employees more and that effect is more pronounced at higher levels, but diminishes at lowers levels. The effect disappeared at Level 5 (division general managers), but was strong at Levels 2 – 4 (the top management team through the junior vice president ranks).

For more information or to arrange a briefing, please contact Doug Russell or Chuck Tanowitz at Schwartz Communications at (781) 684-0770 or by email at INFORMS@schwartz-pr.com.

About Organization Science and INFORMS

Organization Science is a publication of the Institute for Operations Research and the Management Sciences (INFORMS®). INFORMS is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org. More information about operations research is at www.scienceofbetter.org.

Barry List | EurekAlert!
Further information:
http://www.informs.org
http://www.scienceofbetter.org

More articles from Studies and Analyses:

nachricht New study: How does Europe become a leading player for software and IT services?
03.04.2017 | Fraunhofer-Institut für System- und Innovationsforschung (ISI)

nachricht Reusable carbon nanotubes could be the water filter of the future, says RIT study
30.03.2017 | Rochester Institute of Technology

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Making lightweight construction suitable for series production

More and more automobile companies are focusing on body parts made of carbon fiber reinforced plastics (CFRP). However, manufacturing and repair costs must be further reduced in order to make CFRP more economical in use. Together with the Volkswagen AG and five other partners in the project HolQueSt 3D, the Laser Zentrum Hannover e.V. (LZH) has developed laser processes for the automatic trimming, drilling and repair of three-dimensional components.

Automated manufacturing processes are the basis for ultimately establishing the series production of CFRP components. In the project HolQueSt 3D, the LZH has...

Im Focus: Wonder material? Novel nanotube structure strengthens thin films for flexible electronics

Reflecting the structure of composites found in nature and the ancient world, researchers at the University of Illinois at Urbana-Champaign have synthesized thin carbon nanotube (CNT) textiles that exhibit both high electrical conductivity and a level of toughness that is about fifty times higher than copper films, currently used in electronics.

"The structural robustness of thin metal films has significant importance for the reliable operation of smart skin and flexible electronics including...

Im Focus: Deep inside Galaxy M87

The nearby, giant radio galaxy M87 hosts a supermassive black hole (BH) and is well-known for its bright jet dominating the spectrum over ten orders of magnitude in frequency. Due to its proximity, jet prominence, and the large black hole mass, M87 is the best laboratory for investigating the formation, acceleration, and collimation of relativistic jets. A research team led by Silke Britzen from the Max Planck Institute for Radio Astronomy in Bonn, Germany, has found strong indication for turbulent processes connecting the accretion disk and the jet of that galaxy providing insights into the longstanding problem of the origin of astrophysical jets.

Supermassive black holes form some of the most enigmatic phenomena in astrophysics. Their enormous energy output is supposed to be generated by the...

Im Focus: A Quantum Low Pass for Photons

Physicists in Garching observe novel quantum effect that limits the number of emitted photons.

The probability to find a certain number of photons inside a laser pulse usually corresponds to a classical distribution of independent events, the so-called...

Im Focus: Microprocessors based on a layer of just three atoms

Microprocessors based on atomically thin materials hold the promise of the evolution of traditional processors as well as new applications in the field of flexible electronics. Now, a TU Wien research team led by Thomas Müller has made a breakthrough in this field as part of an ongoing research project.

Two-dimensional materials, or 2D materials for short, are extremely versatile, although – or often more precisely because – they are made up of just one or a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Expert meeting “Health Business Connect” will connect international medical technology companies

20.04.2017 | Event News

Wenn der Computer das Gehirn austrickst

18.04.2017 | Event News

7th International Conference on Crystalline Silicon Photovoltaics in Freiburg on April 3-5, 2017

03.04.2017 | Event News

 
Latest News

DGIST develops 20 times faster biosensor

24.04.2017 | Physics and Astronomy

Nanoimprinted hyperlens array: Paving the way for practical super-resolution imaging

24.04.2017 | Materials Sciences

Atomic-level motion may drive bacteria's ability to evade immune system defenses

24.04.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>