CEOs of Fortune 500 companies may make salaries in the seven and eight-figure range, but if they are “underpaid” compared to their peers, they will happily fire workers by the thousands to get small increases to their earnings. A Rutgers School of Management and Labor Relations study has found that between 1992 and 2014, the average “underpaid” S&P 500 CEO eliminated 1,200 jobs and received $600,000 in extra compensation in return — about $500 per job on average.
“Given the perception that layoffs can increase firm performance, we argue that CEOs paid below their peers are likely to use layoffs as a means for increasing their own pay,” said Scott Bentley, who led the study as a doctoral student at Rutgers and now serves as an assistant professor at Binghamton University. “Research suggests CEOs view compensation as a symbol of prestige and status. Even with a seven or eight-figure salary, they might feel slighted if they are earning less than executives at other firms.”
Researchers studied data from 140 S&P 500 companies, omitting firms with obvious business reasons for layoffs and trying to control for around a dozen other variables such as size and performance. The CEOs of those 140 firms made an average of $10 million. Among that group, those paid 34 percent less than their peers were four times as likely to order layoffs the following year, and each layoff axed an average of 1,200 workers. CEO pay rose only if the company’s finances improved following the layoffs. The average company’s stock rose 2 percent after layoffs, while CEO salary increased 18 percent.
“This research raises difficult questions for boards and shareholders,” said Rebecca Kehoe, an associate professor at the Rutgers School of Management and Labor Relations and co-author of the study. “On one hand, we’ve seen a push to rein in excessive CEO compensation packages by giving investors a ‘say on pay.’ On the other hand, underpaying CEOs could lead to layoffs, which have lasting negative effects on the terminated employees and may harm the firm’s reputation.”
Co-written by Bentley, Kehoe, and associate professor Ingrid Fulmer, this is one of the first research studies to examine CEO pay as a predictor of layoffs. The study will be published in an upcoming edition of the academic journal Personnel Psychology.
“CEOs like other employees, engage in pay comparisons with external peers, and their psychological reactions to these comparisons are likely quite similar to those of other employees,” the study said. “In fact, several studies have supported the notion that, like other employees, CEOs and other executives tend to engage in upward social comparisons in which they compare themselves to those they perceive as ‘above them’ for a given attribute. Unlike most other employees, however, CEOs have the power to influence major strategic decisions of organizations— making their reactions to pay comparisons particularly important to study because of the potentially large scope of the consequences associated with those reactions.”