Study: An Overpaid CEO Often Translates To Overpaid Employees
Companies with overpaid CEOs tend to overpay employees and may experience more employee turnover, according to a new research report co-authored by Smeal's Timothy Pollock, associate professor of management.
Study: An Overpaid CEO Often Translates To Overpaid Employees
UNIVERSITY PARK, PA (September 27, 2006) – Companies with overpaid CEOs tend to overpay employees and may experience more employee turnover, according to a new research report co-authored by a Smeal College of Business professor.
Timothy Pollock, associate professor of management at Penn State's Smeal College, and his colleagues James Wade of Rutgers University and Charles O'Reilly III of Stanford University examined payroll and human resources data from more than 120 companies over a five-year period to identify trends in how CEO pay affects other employees.
The researchers found that when a CEO was overpaid by 64 percent, the level of overpayment in the firm cascaded down five levels. COOs and CFOs (level 2) were overpaid by an average of 26 percent and the trend continued down to division general managers (level 5), who were overpaid an average 12 percent.
Further, they found that employees of an overpaid CEO may be more likely to leave their job because they don't perceive their own pay as fair in light of the CEO's high salary. 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.
Ultimately, this systemic overpayment and turnover can negatively impact overall organizational performance and shareholder value.
"High CEO pay is often an expenditure that boards and investors are willing to absorb," Pollock said. "But our research shows that shareholders might want to be more careful about exorbitant CEO salaries because they tend to cost corporations far more in their payrolls and in employee turnover."
Other findings in the study include:
More powerful CEOs (those who also serve as chairman) tend to pay their higher-level employees more.
Employees of underpaid CEOs are more likely to leave if they are underpaid at a greater percentage than the CEO and less likely to leave if they are underpaid less than the CEO.
CEOs tend to be concerned with the perception of fairness. If a CEO is paid generously, he/she will typically use influence to pay others generously as well.
"Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation," appears in the September/October 2006 issue of Organization Science.
REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu.
Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the Center for Digital Transformation, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.
