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CEO Pay Slice

A Predictive Tool for Corporate Governance Issues

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The CEO Pay Slice Background: As CEO pay has exploded, it has become a prime topic for study and debate. A group of academic researchers has taken a novel approach, examining what they call the "CEO Pay Slice." This is the CEO's pay divided by the total pay for the top five executives of the firm, including the CEO. This has been increasing over time, and now averages 35%. See the website of the Project Syndicate for details.

The CEO Pay Slice Study: The researchers find that, as the CEO pay slice increases, profitability decreases. Why should this be so? It certainly appears counterintuitive, like pay for nonperformance. Their general conclusion is that a high CEO pay slice suggests possible corporate governance issues, such as:

  • Poor acquisition decisions, often yielding negative returns.
  • Rewarding CEOs for luck, such as for cyclical upswings that lift all firms in the industry.
  • Lack of CEO accountability, as evidenced by low CEO turnover after bad performance.
  • Option grants whose terms are unduly stacked in the CEO's favor.
  • Undue CEO influence over corporate decisions.

CEO Pay Slice Conclusions: While the authors caution that a high CEO pay slice does not prove corporate governance problems in itself, the preponderance of the data suggests that it signals possible issues. The implication is that the CEO pay slice should be a consideration for a potential hire choosing among prospective employers, as a window into their organizational cultures. It is particularly relevant for people in financial control or compliance positions, related to the psychology of power.

Meanness in Organizations: In a related vein, a research paper entitled "When Executives Rake in Millions: Meanness in Organizations" was published in 2010. The authors, Sreedhari Desai of Harvard University, Jennifer George of Rice University and Arthur Brief of the University of Utah, looked for correlations between executive compensation and how employees are treated. Their key finding: the larger the disparity between executive pay and that of the typical employee, the more likely employees are to be mistreated. Their hypothesis: the larger the pay gap, the more likely executives are to be arrogant and dictatorial. For a synopsis, see "Does CEO Pay Make CEOs Mean?," The Wall Street Journal, 7/17/2010.

Related Topics: Follow the links below for articles on related topics.

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