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The two sides of CEO pay injustice

The two sides of CEO pay injustice PurposeThe purpose of this study was to examine the extent to which chief executive officers (CEOs) deserve the pay they receive both in terms of over and underpayment.Design/methodology/approachRather than using the traditional normal distribution view in which CEO performance clusters around the mean with relatively little variance, the authors adopt a novel power law approach. They studied 22 industries and N = 4,158 CEO-firm combinations for analyses based on Tobin’s Q and N = 5,091 for analyses based on return on assets. Regarding compensation, they measured the CEO distribution based on total compensation and three components of CEO total pay: salary, bonus, and value of options exercised.FindingsIn total, 86 percent of CEO performance and 91 percent of CEO pay distributions fit a power law better than a normal distribution, indicating that a minority of CEOs are producing top value for their firms (i.e. CEO performance) and a minority of CEOs are appropriating top value for themselves (i.e. CEO pay). But, the authors also found little overlap between CEOs who are the top performers and CEOs who are the top earners.ImplicationsThe findings shed new light on CEO pay deservingness by using a novel conceptual and methodological lens that highlights systematic over and underpayment. Results suggest a violation of distributive justice and offer little support for agency theory’s efficient contracting hypothesis, which have important implications for agency theory, equity theory, justice theory, and agent risk sharing and agent risk bearing theories.Practical implicationsResults highlight erroneous practices when trying to benchmark CEO pay based on average levels of performance in an industry because the typical approach to CEO compensation based on averages significantly underpays stars and overpays average performers.Originality/valueResults offer new insights on the extent of over and underpayment. The findings uncover an extremely large non-overlap between the top earning and top performing CEOs and to an extent far greater in magnitude than previously suggested. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Research: The Journal of the Iberoamerican Academy of Management Emerald Publishing

The two sides of CEO pay injustice

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1536-5433
DOI
10.1108/MRJIAM-02-2017-0731
Publisher site
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Abstract

PurposeThe purpose of this study was to examine the extent to which chief executive officers (CEOs) deserve the pay they receive both in terms of over and underpayment.Design/methodology/approachRather than using the traditional normal distribution view in which CEO performance clusters around the mean with relatively little variance, the authors adopt a novel power law approach. They studied 22 industries and N = 4,158 CEO-firm combinations for analyses based on Tobin’s Q and N = 5,091 for analyses based on return on assets. Regarding compensation, they measured the CEO distribution based on total compensation and three components of CEO total pay: salary, bonus, and value of options exercised.FindingsIn total, 86 percent of CEO performance and 91 percent of CEO pay distributions fit a power law better than a normal distribution, indicating that a minority of CEOs are producing top value for their firms (i.e. CEO performance) and a minority of CEOs are appropriating top value for themselves (i.e. CEO pay). But, the authors also found little overlap between CEOs who are the top performers and CEOs who are the top earners.ImplicationsThe findings shed new light on CEO pay deservingness by using a novel conceptual and methodological lens that highlights systematic over and underpayment. Results suggest a violation of distributive justice and offer little support for agency theory’s efficient contracting hypothesis, which have important implications for agency theory, equity theory, justice theory, and agent risk sharing and agent risk bearing theories.Practical implicationsResults highlight erroneous practices when trying to benchmark CEO pay based on average levels of performance in an industry because the typical approach to CEO compensation based on averages significantly underpays stars and overpays average performers.Originality/valueResults offer new insights on the extent of over and underpayment. The findings uncover an extremely large non-overlap between the top earning and top performing CEOs and to an extent far greater in magnitude than previously suggested.

Journal

Management Research: The Journal of the Iberoamerican Academy of Management – Emerald Publishing

Published: Apr 9, 2018

References

  • The influence of CEO power on compensation contract design
  • Inequity in social exchange
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