UF Study: Strong CEOs Garner High Salaries At Shareholders’ Expense
GAINESVILLE, Fla. — Most people are intimidated by asking for a raise, so imagine how much easier it would be if you could pick your boss, set his pay and be almost guaranteed a glowing job evaluation — regardless of whether you actually did a good job.
Many of America’s chief executive officers enjoy just such a luxury, according to a new University of Florida study. The bosses in those cases are corporate managers and boards of directors, who supposedly are the shareholders’ watchdogs but who frequently fall sway to the CEO’s charms, said Henry Tosi, a UF management professor who has studied CEO salaries for 15 years.
As a result of those CEOs’ opportunistic behavior, shareholders’ profits may be suffering as their interests come in second to those of CEOs and management, said Tosi, who recently oversaw the survey graduate student Paula Silva did for her doctoral dissertation.
“It’s pretty clear that when the CEOs are powerful, they’re able to have a major effect on the nature of the criteria used to evaluate them, and those are the criteria that tend to be more subjective,” Tosi said.
With recent surveys placing the average annual compensation for CEOs of large public companies at roughly $12 million — about 750 times that of the typical blue-collar worker — the news media, the public and the Securities and Exchange Commission are paying ever-increasing attention to CEO salaries. Against that backdrop, Silva said, boards of directors are under more pressure than ever to justify and explain how they evaluate CEOs.
Since performance-based criteria are more likely to put the interests of management in line with those of shareholders, she said, subjective behavior-based criteria should be given less weight.
However, Silva’s study shows that in the case of powerful CEOs, who may be at the helm of nearly half of America’s corporations, that’s not happening.
“By understanding the performance evaluation process,” Silva writes in her dissertation, “it may be possible to discern how CEO pay decisions are made, and maybe provide some answers to the public outcries for justification of CEO salaries.”
Silva surveyed chief compensation officers at more than 200 corporations who were members of the American Compensation Association. The survey sought to determine whether CEOs were evaluated differently in firms where CEOs were very powerful than in firms where stockholders hold the reins.
Silva and Tosi found that when the CEO and management both were more powerful than stockholders, the CEO’s evaluation was less likely to be tied to the company’s financial performance and more likely to be qualitative and subjective. Furthermore, they found, the CEOs in those companies were more likely to be chairmen or chairwomen of the board, giving them exceptional leverage in determining how they would be evaluated and who else would be on the board.
“If you look at General Motors in the 80s, when their market share kept dropping, [then-CEO] Roger Smith’s salary kept going up. Why wasn’t he replaced? The answer is that dominant coalition he had in place on the board of directors and in the top management group,” Tosi said.
On the other hand, in companies in which owners — shareholders — were strong, CEOs had far less say in how their performance would be rated, the study showed. In those firms, the predominant criteria was financial performance, and more subjective factors such as “leadership” or “managerial skill” had secondary importance.
“We’ve seen this concern with CEO pay rise in recent years and always suspected — even knew — this cozy relationship between CEOs and boards existed,” Tosi said. “This study shows us something about how it happens.”
- Steve Orlando
- Henry Tosi