'Underpaid' CEOs more likely to call for layoffs
- CEOs who are paid less than their peers are more likely to engage in layoffs, according to new research published in ScienceDaily. The study, led by faculty at Binghamton University, State University of New York, and at the Rutgers School of Management and Labor Relations, found that those who are "underpaid" are four times more likely to lay off staff, regardless of company size and industry conditions.
- But "do these actions actually pay off for the CEO?" ScienceDaily asked; "Well, it depends." CEO pay generally increased in the year following a layoff when the company's performance improved. But if the company and the shareholders didn't benefit from the layoffs, neither did the CEO, in most cases.
- Scott Bentley, assistant professor of strategy at Binghamton, said the findings highlight the importance of corporate governance and aligning the interests of the CEO with shareholders and employees. "While we can't necessarily restrict a CEO's behavior or motivations, there may be ways to restrict the extent to which they are rewarded or impacted by decisions such as layoffs." The researchers analyzed data from S&P 500 companies from almost 20 years, across various industries.
While many factors go into setting CEO pay, the issue has never been as transparent as it's now becoming. Many employees, for the first time, got to see how their wages stack up against their CEOs' pay earlier this year. The disclosure was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and comes as other pay transparency movements are gaining momentum.
Shareholders are increasingly putting pressure on employers to conduct pay audits, to ensure protected characteristics are not factoring into pay. And several states, cities and counties have adopted salary history bans in recent months, forbidding employers from asking job applicants about past compensation.
These measures, some say, will force employers to adopt a formal compensation strategy and to be transparent about pay ranges. California's ban even requires employers to set ranges and disclose them to applicants who ask.
Still, some employers are holding out, fighting back against the bans and keeping pay a tightly guarded secret. They must remember, however, that it remains illegal, according to the National Labor Relations Board, to prevent workers from discussing pay.
Correction: This story has been updated to reflect clarified information about who authored the report.