High-Priced CEO Salaries Unaffected by Public Outrage
CREDIT: CEO Salary image via Shutterstock
In the wake of the Occupy Wall Street movement, you might assume that public outcry over overinflated chief executive officer salaries was finally having an impact. But, in fact, the public has been concerned about executive salaries for decades and the outcome has rarely changed.
That's the finding of research, conducted by Camelia Kuhnen, an associate professor of finance at Kellogg School of Management and Alexandra Niessen, an assistant professor at the University of Mannheim, which found that even in the face of backlash by the press and public, executive pay packages were often restructured, but rarely reduced in total value.
To conduct this study, the researchers looked through a database of 26,000 articles, compiled over the past 20 years. These articles were then combed through a text analyzer that looked for specific negative words and phrases to see whether the mood of the public and the press affected executive compensation.
"I think the public did care about the level of CEO pay," Kuhnen said. "The public has cared a lot about income inequality for the past couple of decades."
The research proved that negative press or a public outcry may have challenged CEO pay, but ultimately it had little impact in changing the overall value of the package. Instead, executives found alternative avenues to receive the same pay. For example, when a public outcry over the size of stock options for CEOs started in the 1990s, executives shifted compensation away from stock options to other salary options, such as bonuses.
"Depending on what the public is focused on, we see firms react by diminishing that type of pay," Kuhnen said."When you shift away from options and pay into salary, you diminish the strength of the connection between how a CEO is paid and how the company is doing. In other words, (you are) loosening the coupling between pay and performance, (which) means CEOs have less incentive to work hard."
A significant takeaway from this research also comes from the fact that executives do in fact pay attention to the popular sentiment around them. This means that a public outcry, such as Occupy Wall Street or the anger seen after the 2008 financial collapse, is heard by CEOs and other executives, even if the desired outcome does not occur.
"It’s a complicated issue," Kuhnen said. "It’s not as simple as, 'The public is a wonderful governing mechanism and will help all firms do better.'"