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Underpaid CEOs tend to lay off employees

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It may be a natural instinct for people to hide their vulnerability at work, and the CEO at your company is no exception. However, given the power to make strategic company decisions, CEOs might look to feed their egos at the expense of their employees.

According to the findings from a research conducted by Scott Bentley, an assistant professor of strategy at Binghamton University, and fellow researchers at Rutgers University, there is a strong correlation between the relative pay of a CEO to his or her peers and the occurrence of layoff announcements in his or her company.

In fact, the research found that CEOs who earn less than their peers are four times more likely to announce a layoff.

As Bentley explained, layoffs are the easiest options to cut cost, which potentially leads to better company performance and hence higher pay of the CEO. Unlike other choices like mergers or acquisitions, layoffs can be determined overnight without the approval of shareholders, the board or regulators.

To make the findings more representative, the researchers controlled for various factors that could influence a layoff, such as industry conditions and company performance, before reaching the conclusion.

While some may still think it can be a sheer coincidence, Bentley shared a surprising discovery that the effect of lower pay on the likelihood of layoffs disappears once a CEO’s pay catches up with 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,” he said.

Despite the CEO’s intentions, layoffs don’t necessarily lead to their desired effect. The research found that the CEO’s pay only increased if the company can benefit from the layoffs.

However, the professor stressed that it is important to align the interests of the CEO with shareholders and employees. “While we can’t necessarily restrict a CEO’s behaviour or motivations, there may be ways to restrict the extent to which they are rewarded or impacted by decisions such as layoffs,” said Bentley.

The research analysed data including CEO’s pay and layoff announcements made by S&P 500 firms from 1992-2014 in the financial services, consumer staples and IT industries.

ALSO READ: What motivates employees to work harder? It’s their bosses’ paychecks!

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