Bob Sutton has a great summary of the research around CEO comp and how overpaid CEOs affect business performance / recruitment. Here are the findings he cites, some editing on my part:
- You can overpay other senior executives too and thus entice them to stay; or you can create a big gap between the overpaid CEO and everyone else, which leads other senior executives to jump-ship. Either way, overpaying the CEO has costs beyond the extra dollars the CEO gets.
- When there are bigger pay differences between the CEO and other members of the top management team, organizational performance tends to suffer — and the negative effects of such pay dispersion is most pronounced in high-technology firms.
- When the CEO is getting a lot more money than the next executive, he or she will likely be afflicted with other signs of narcissism.
- If the CEO is overpaid, the decision to overpay the rest of the top team isn’t a purely good thing — reducing pay dispersion when the CEO is overpaid can cause a company to waste even more money.
- While this research so far seems to be that paying the CEO a lot more than others isn’t a good thing for the company, there are some studies that suggest this isn’t always the case.
I’ve seen firms fall prey to the fourth point — they pay the CEO what the market rate is (they have no choice if they want the best) and then, in an effort to narrow the gap between his comp and everyone else’s, they overpay the senior execs. I would advise a company to pay the CEO what he could command in the market, pay the senior execs what they could command in the market, then use other types of incentives to retain and please the senior execs as opposed to simply escalating their cash comp to reduce the pay dispersion between #1 and #2, 3, 4, and 5.
Want to narrow the CEO:others comp gap?
Pay the CEO his US market value in $$… pay the others their market value in other currencies (say Euro/GBP)… By the time they cash their checks,the gap will close thanks to performance of US economy 🙂
My psychology professor once told me that the largest case group for known sociopaths where the CEOs of America. Whether he was joking or not, that seems interesting that group was chosen.
Gunnar’s psych prof makes a good point. IMHO, sociopaths are also quite common in politics and crime.
He only talks about it indirectly, but Jim Collins offers some pretty compelling evidence that highly paid CEOs are almost guaranteed to underperform relative to their compensation. One of the biggest lessons in Good To Great is to hire from within and stay away from charismatic CEOs (who, among other things, tend to be exceptionally good at negotiating outsized comp packages).
In general, make your company a great place to work, and hire people who care about that fact.
Compensation should be secondary for the top talent. Don’t rip them off, but they’re not going to hassle about 10% here or there.
I wonder if there is any research about the effect of CEO pay on staff or front line workers. My guess is that high executive pay might lead to learned helplessness, as the front line realizes that they have little chance of ever achieving such a high salary and decide to slack off or even actively sabotage the company.
When common sense goes out the window, the system begins to break down. Abuse is the capitalist enterprise isn’t how to nurture it and improve it.
http://pacificgatepost.blogspot.com/2008/03/executive-compensation-common-sense.html