The work entitled ''Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation'' studied 120 companies over a period of five years and is by far the most complete study of its type.
The study unearthed some interesting findings, which include that overpaid CEOs cost more than was earlier thought. It had been generally believed that even if a CEO was being paid too much that a big company could easily afford the cost. The researchers discovered that the amount a CEO is paid does indeed directly affect the compensation at the lower rungs of the company ladder. To clarify, in one of the cases, a CEO was being overpaid by 64 percent; more than the people in his company at the next level (Chief Of Operations and Chief Financial Officer), who were being overpaid by 26 percent. People at the fifth level, which were divisional general managers, were being paid 12 percent too much. This result of overpayment affects the company's performance as a whole as well as the shareholder value of the company.
The study also found that employees look at the CEOs' salaries to determine whether or not what they are being paid is fair. In other words, if the CEO is being overpaid, then those beneath him or her are more likely to leave the company. This turnover effect becomes even more apparent the further down the ladder you get from the CEO. It seems that even if an employee of the company is being paid more than others in the market who hold the same position, if their CEO is overpaid by a larger percentage than they are, they will be much more likely to leave that organization.
Lead author James B. Wade from Rutgers University said that their research discovered that overpayment of CEOs is relative to a company's turnover, which could have long-term consequences for the company. It is very likely that those people who are more apt to quit because they feel the payment structure is unfair are those employees working themselves up in the company who would have otherwise risen to the top levels of management.
The study also discovered that if the CEO is being underpaid by a larger percentage than an employee under him, that employee is less likely to quit, but if the CEO is underpaid less than an employee beneath him, that employee is more likely to leave the company.
On the positive side of things, the group discovered that CEOs do seem to be concerned with fairness and that if a CEO is well paid, he or she will typically use power to pay those beneath him or her well. CEOs are more likely to share rewards than they are likely to share burdens. Timothy Pollack from Penn State said that this can be costly and does open the possibility of hurting the strength of a firm if the rewards are not shared fully.
A final interesting finding shows that the more powerful CEOs, such as those who are Chairman of the Board, have a tendency to pay their employees more when the employees are at higher positions in the company but that this diminishes at the lower levels. It actually disappeared at the fifth level (division general managers) and was apparent at levels two through four—the top managers down through the junior VP.
