Some CEOs don’t get paid the market rate — and they know it.
Chief executives who are paid less than their peers are four times more likely to lay off their employees, according to research published this week by the State University of New York at Binghamton. Researchers analyzed data that included CEO pay and layoff announcements made by S&P 500 SPX, -0.08% firms from 1992 to 2014 in the financial services, consumer staples and information technology industries.
Adjusting the analysis for a number of different factors that could influence a layoff — including industry conditions, company size and the firm’s performance — researchers found that the CEOs who were paid less than the market rate for companies of their size and type were far more likely to announce a layoff. What’s more, researchers found that CEO pay generally increased in the year following a layoff when firm performance also improved.
Company bosses are sensitive to how their salaries compare with their peers. “CEOs are just like any other type of employee,” said Scott Bentley, an assistant professor of strategy at Binghamton University’s School of Management, and the lead researcher on the study. “They are going to compare their pay to those around them. The difference is that the average employee can’t make strategic decisions for the company that influences their own pay. Executives can.”
While there are some instances where pay increased even when the company’s performance decreased, Bentley said his research found that, in most cases, if the company and the shareholders didn’t benefit from the layoffs, neither did the CEO. The study, “Payoffs for layoffs? An examination of CEO relative pay and firm performance surrounding layoff announcements,” has been accepted by the journal “Personnel Psychology” and is available online.
Also see: The gender pay gap applies to Uber drivers too
Chief executive pay in the U.S. is among the highest in the world, according to a recent report by the staff of Keith Ellison, a Democratic congressman for Minnesota. U.S. publicly-listed companies have begun releasing how much their CEOs make under a 2015 rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Pay ratios of Fortune 500 company CEOs to their employees range from 2 to 1 to nearly 5,000 to 1. The average CEO/worker pay ratio is 339 to 1.
Ellison’s staff examined the ratios of the first 225 Fortune 500 companies to publicly disclose their CEO pay. These companies collectively employ more than 14 million workers and generate at least $6.3 trillion in revenue. Two-thirds of the top 1% of American households are headed by corporate executives, the report — “Rewarding or Hoarding?” — found. Median-salaried employees in all but six companies would need to work for 45 years to earn what their CEO makes in one year.
Income inequality has soared in the U.S. over the last five decades, despite increases in worker productivity, the report said. “Incomes for most Americans have been stagnant for four decades,” the researchers wrote. “Instead, this increase in income inequality was almost entirely driven by soaring compensation levels for the top 1% of income earners.” The company with the smallest ratio in the database is Warren Buffett’s Berkshire Hathaway BRK.A, -0.14% with a ratio of 2 to 1.
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