Can high CEO compensation diminish your organization’s returns?

Has your organization considered that a higher-paid executive could have ramifications beyond pure cost? In a recent study published in the Journal of Management, researchers sought to determine whether greed, as manifested in the form of a high compensation package, could influence shareholder returns.

The study analyzed the cases of more than 330 companies, comparing CEO compensation with shareholder returns and taking into account factors like the amount of power held by the executive, the difference in compensation between the CEO and the second-highest paid individual and CEO tenure. They discovered that overall, the higher the executive's pay, the less return shareholders saw, though the effect could be mitigated. 

"Because of stronger identity with the organization, the effect of greed on firm performance will be less negative as CEO tenure increases, because harming the organization—and by extension its shareholders—would concomitantly be in conflict with part of the manager's self-concept," the researchers wrote. In essence, this means that if a CEO is in it for the long haul, it matters less if they are overtly interested in high compensation. 

Securing decision-making power with the board and distributing c-level compensation more equally also dampened the effect on shareholder returns.

Compensation can be a tricky subject of discussion with any incoming CEO, especially when that person sees themselves as the figurehead or center of a particular company.

Writing for the Washington Post on the study, historian Nancy Koehn noted that extreme rewards for executives create a sense of inequality, which could backfire on an organization's attempt to bring new leadership to the table.

Your business is free to compensate your CEO however you choose, but you should be sure to find one whose values and expectations align with your organization's goals.

Finding people is easy, but finding the RIGHT people is not. YES Partners helps companies FIND the right people – for all company functions, across many industries and globally.

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