Why CEO Pay Matters

Armen Hareyan's picture
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Executive Pay

Executive compensation scholars have released new, breakthrough research analyzing perceptions of fairness in executive pay and how CEO over- or underpayment cascades down to lower organizational levels.

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The paper, "Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation," looked at data from over 120 firms over a five-year period and is the most comprehensive study of its kind to be conducted. Authored by James B. Wade at Rutgers University, Charles A. O'Reilly, III at Stanford's Graduate School of Business, and Timothy G. Pollock at Pennsylvania State University's Smeal College of Business, it will be published in the September/October 2006 issue of Organization Science.

The techniques of Operations Research (O.R.), the discipline of applying advanced analytical methods to help make better decisions, drove the analysis that appears in the paper. Among the key findings:

CEO Overpayment Has Higher Costs Than Previously Realized: Arguments have been made that even if a CEO is overpaid, a large company can easily absorb the cost. However, the researchers found that CEO pay has direct consequences for compensation at lower employee levels.

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