Key Concept

In recent years, calls to address CEO compensation packages have been rife. The press has ‘named and shamed’ many organizations for their excessive pay schemes, but despite all the noise, there has been little worker revolt. So what exactly is the effect of CEO pay, if any, on employee attitudes? This Idea examines the relationship between the two, and offers guidance for individuals involved in setting CEO compensation.

Idea Summary

“Excessive, shameful, soaring…” these are just some of the words used by the media when discussing executive compensation. Over the past two decades in particular, CEO compensation has increased exponentially, with many organizations drawing criticism for it. Though a 2013 article in The Wall Street Journal suggests that compensation seems to be somewhat levelled now, a typical package for a CEO of a large company still remains at around $10 million, including pay, bonuses and equity grants.

Given the consistently negative press surrounding CEO packages, why haven’t we seen more instances of worker revolt? Researchers from institutions including NUS Business School set-out to examine if given all the smoke that is out there about these high levels of compensation, is there any fire in the workforce?

By linking a large-scale survey of employee attitudes to CEO compensation data for public companies based in the US, they found that employee attitudes do appear to be related to some measures of CEO compensation; however, the effect size was quite small. Nevertheless, changes in CEO salary were negatively related to evaluation of senior management and general satisfaction. On the other hand, changes in total CEO compensation were positively related to evaluation of senior management and general satisfaction. Finally, CEO bonus levels were positively related to general satisfaction.

Therefore, it seems that the relationship between CEO compensation and employee attitudes depends upon the attributions that employees make. While employees may react negatively to increases in salary, salary is not the component of CEO compensation that has grown rapidly. This could be because most employees do not know what their CEOs earn, or they do not believe they can do anything about it. And so, even though there is a lot of smoke in the press, there is not much fire among workers.

Methodology: The researchers surveyed 6,752 adult workers in the US in 2005, and linked the responses to compensation data for companies the respondents worked for, using Standard & Poor’s Compustat Executive Compensation database. In order to then understand the relationship of CEO compensation to employee attitudes, dependent and independent variables were examined, such as total CEO compensation and changes in compensation.

Business Application

From an employee perspective, changes in performance-based components of pay are preferable over changes in salary. As such, favouring incentive-based pay (such as bonuses) can not only help align CEO outcomes with shareholder interests, but also avoid negativity on the part of employees.

Nevertheless, if there is going to be a substantial increase in salary, then any potentially negative effects on employee attitudes can be mitigated with a communication plan, developed specifically to try and enhance employees’ feelings of procedural justice. The rationale for the level of compensation and the process used to set it should be openly discussed with them.