A Study in Greed

CEOWhen top managers and executives pursue “extreme wealth,” it’s the company’s shareholders that often pay the price, according to new research.

In a study that recently appeared in the Journal of Management, a team of researchers conducted a statistical examination of 335 companies, analyzing stock market returns and dividends, and conducting interviews with top executives and an independent panel of experts from a variety of disciplines, including academic scholars and senior business executives.

The study looked at the size of CEOs’ perquisite packages, analyzed the difference between a CEO’s cash compensation and that of his or her No 2. executive, and performed an analysis of CEOs who were overpaid compared to a benchmark of their peers.

In the process, the authors—led by Katalin Takacs Haynes, assistant professor of strategic management at the University of Delaware—found the “pursuit of extreme wealth by top managers can lead to lower performance and loss of shareholder value,” according to a summary of the findings appearing at UDaily, the University of Delaware’s online news service.

“Self-interest is OK, but eventually it reaches a tipping point,” said Haynes. “When it is taken to the extreme—when it becomes greed—it is detrimental to firm value.”

There is somewhat of a silver lining in the findings, however. The researchers also concluded that a powerful board or long CEO tenure can “moderate the relationship between greed and shareholder return.”

Some CEOs “appear to direct more of the firm’s resources toward themselves than others, and this can occur more when managers have a lot of discretion or have a short tenure, or if the board is weak,” according to Haynes. “Interestingly, we found that the negative effects of executive greed on shareholder wealth decreases as CEOs experience more time in their role.”

HR can play a part in mitigating this effect, Haynes told HRE.

“There are some points for HR executives to consider when designing compensation packages, while keeping shareholders’ preferences in mind,” she says.

“”Encourage shareholders to actively participate in the compensation process,” for example. “SEC regulations allow for shareholders to express their opinions about compensation packages via the ‘say on pay’ regulations.”

While say-on-pay is non-binding, “ignoring shareholder no-votes invites public scrutiny and negative attention to the company,” adds Haynes, advising HR executives and compensation committees to pay close attention to shareholders who choose to actively participate in the executive compensation process via say-on-pay.

HR leaders must also look out for “the indicators of greed,” she says, such as excessive perquisite compensation in the “other annual” and “all other” categories; the ratio of the CEO’s total comp package to that of the organization’s second-in-command; and CEO pay at peer companies and industry benchmarks, which help identify possible overpayment of your organization’s chief executive.

“CEOs play a significant role in setting their own pay, and are not passive recipients of pay,” says Haynes, “as the term ‘overpayment’ implies.”

One thought on “A Study in Greed”

Comments are closed.