Study: ‘Underpaid’ CEOs 4x more likely to order layoffs

CEOs who make less than their peers are more likely to order layoffs, according to a study by researchers at the Rutgers School of Management and Labor Relations.

Among 140 firms that had layoffs during the study, the average CEO eliminated 1,200 jobs and received $600,000 in addition revenue 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.”

The study found:

  • The average CEOs 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;
  • In most cases, CEOs pay increased only if firm performance improved after the layoffs.

One year after layoffs:

  • Firm performance increased an average of 2 percent;
  • Firm net income increased an average of 8 percent;
  • CEO salary and bonuses increased an average of 18 percent;
  • CEO total compensation 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.”

The study analyzed data on 140 S&P 500 firms during 1992-2014, focusing on the consumer staples, financial services and information technology industries. The study was co-authored by Bentley, Kehoe and Rutgers School of Management and Labor Relations associate professor Ingrid Fulmer.