Underpaid CEOs Are More Likely to Fire Employees On average, researchers found CEO pay generally increased in the year following a layoff when firm performance also improved

By Nidhi Singh

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur Asia Pacific, an international franchise of Entrepreneur Media.

graphicstock

From implementing strategic policies to motivating employees, a chief executive officer or CEO plays a crucial role in the effective running of a company. In companies, one of the major motivating factors for better performance at workplace is higher pay. A research, however, has found that CEOs who are paid less than their peers are four times more likely to engage in layoffs.

The research by the Rutgers School of Management and Labor Relations and Binghamton University in the US analysed if the CEO pay was related to layoff announcements made by the C-suite executive themselves. The researchers examined the data that included CEO pay and layoff announcements made by Standard & Poor's 500 firms from 1992-2014 in the financial services, consumer staples and IT industries.

After adjusting the analysis for a number of factors that could influence a layoff (industry conditions, company size, firm performance, etc.), the researchers found the "underpaid" CEOs were four times more likely to announce a layoff, even when all of those other factors were accounted for.

Layoff Fears

Scott Bentley, assistant professor of strategy at Binghamton University, says in the research, "In terms of strategic decisions that a CEO can make that could lead to higher pay, layoffs are one of the easiest to do. Relative to other decisions such as mergers or acquisitions, layoffs typically don't need the approval of shareholders, the board or regulators, and they don't take years to do. Layoffs can be determined overnight."

"In a way, CEOs are just like any other type of employee. They are going to compare their pay to those around them. The difference is that the average employee can't make strategic decisions for the company that influences their own pay. Executives can," he adds.

Pay Cuts Or Job Layoffs?

What surprised Bentley the most was that the relationship between lower pay and the likelihood of layoffs disappears when a CEO is paid more than his or her peers.

"Right around the point where CEOs are paid equal to their peers, the effect kind of goes away. We found that there's this huge dropoff in the likelihood of announcing layoffs once your pay is relatively the same as, or more than, your peers," says Bentley.

On average, researchers found CEO pay generally increased in the year following a layoff when firm performance also improved.

"While there are some instances where pay increased when performance decreased, we found that if the company and the shareholders don't benefit from the layoffs, neither does the CEO in most cases," Bentley explains.

The findings highlight the importance of corporate governance and aligning the interests of the CEO with shareholders and employees.

"While we can't necessarily restrict a CEO's behavior or motivations, there may be ways to restrict the extent to which they are rewarded or impacted by decisions such as layoffs," says Bentley.

Nidhi Singh

Former Correspondent, Entrepreneur Asia-Pacific

A self confessed Bollywood Lover, Travel junkie and Food Evangelist.I like travelling and I believe it is very important to take ones mind off the daily monotony .

Business News

JPMorgan Shuts Down Internal Message Board Comments After Employees React to Return-to-Office Mandate

Employees were given the option to leave comments about the RTO mandate with their first and last names on display — and they did not hold back.

Franchise

Turn Your Passion for Pets into a Business with a Wag N' Wash Franchise

Wag N' Wash is a store where pets can be cherished every day by feeding, washing, and spoiling them just how they like it.

Business News

The FTC Is Readying a Case Against the Largest U.S. Apartment Landlord. Here's Why.

The issue is with fees that allegedly weren't disclosed in advertisements for rental units.

Business Culture

What Every Business Leader Can Learn From Dutch Bros' People-First Culture

The coffee chain is turning employees into owners of the customer experience.

Business News

'I Want the Best People on Our Teams': Meta Is Laying Off More Than 3,000, CEO Mark Zuckerberg Calls for 'Extensive Performance-Based Cuts' — Read the Memo

In an internal memo shared on Tuesday, Zuckerberg said it's "going to be an intense year" at the company.

Growing a Business

How Meta Generated $32 Billion in Ad Revenue Last Quarter — and How You Can Create Million-Dollar Weekends Using the Same Strategies

Meta's staggering $32 billion quarterly ad revenue isn't just about size; it's about strategy, systems and execution as well.