Study: ‘Underpaid’ CEOs Four Times More Likely to Order Layoffs

On average, CEO pay jumps more than a half-million dollars the year after cutting jobs

On Aug 22, 2018

CEOs who are paid less than their peers are significantly more likely to order layoffs, according to a new study led by researchers at the Rutgers School of Management and Labor Relations and accepted for publication by the journal Personnel Psychology. Among firms that engaged in layoffs during the study period, the average CEO eliminated 1,200 jobs and received $600,000 in additional compensation the next year.

“Given the perception that layoffs can increase firm performance, we argue that CEOs paid below their peers are likely to use layoffs as a means for increasing their own pay,” said Scott Bentley, who led the study as a Ph.D. student at Rutgers and now serves as an assistant professor at Binghamton University. “Research suggests CEOs view compensation as a symbol of prestige and status. Even with a seven or eight-figure salary, they might feel slighted if they are earning less than executives at other firms.”

Researchers analyzed data on 140 S&P 500 firms for the years 1992 – 2014, focusing on the consumer staples, financial services, and IT industries. They omitted companies with an obvious business reason for layoffs (acquisition, divestiture, natural disaster) and they controlled for firm size, performance, and close to a dozen variables to ensure accurate comparisons. The researchers did not interview CEOs as part of the study and they did not have access to internal financial projections.

The study finds:

• Among the 140 firms, the average CEO’s total yearly compensation was $10 million.
• CEOs paid at least 34 percent less than their peers in a given year were four times more likely to order layoffs the following year.
• The average layoff affected 7 percent of the firm’s employees, or approximately 1,200 people.
• In most cases, the CEO’s pay increased only if firm performance improved after the layoffs.

One year after layoffs:

• Firm performance (change in stock price and dividends) increased an average of 2 percent.
• Firm net income (profit) increased an average of 8 percent.
• CEO salary and bonuses increased an average of 18 percent.
• CEO total compensation (salary, bonuses, stock options) increased an average of $600,000.

“This research raises difficult questions for boards and shareholders,” said Rebecca Kehoe, an associate professor at the Rutgers School of Management and Labor Relations and co-author of the study. “On one hand, we’ve seen a push to rein in excessive CEO compensation packages by giving investors a ‘say on pay.’ On the other hand, underpaying CEOs could lead to layoffs, which have lasting negative effects on the terminated employees and may harm the firm’s reputation.”

Co-authored by Bentley, Kehoe, and Rutgers School of Management and Labor Relations associate professor Ingrid Fulmer, this is one of the first research studies to examine CEO pay as a predictor of layoffs. Now available online, the study will appear in an upcoming edition of the academic journal Personnel Psychology.

Note: This study focuses on patterns of relationships across organizations and does not allow the researchers to draw conclusions about any specific firms, CEOs, or layoff announcements.

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