Another Knock on Executive Pay

Swelling c-level executive pay may pose more than a moral problem. It may be a morale problem, too.

A large pay gap between chief executives and those who work for them often erode employee loyalty, encourage turnover, and impair the ability to hire talented new people.

That, at least, is the conclusion of a recent study in the journal Organization Science by three economists: Charles O'Reilly of Stanford's Graduate School of Business, James Wade of Rutgers University, and Tim Pollock of Pennsylvania State University.

Their study was based on data from 120 large public companies over a five-year period. In one company that paid its C.E.O. 50 percent more than the industry norm and its general managers 50 percent less than the norm, turnover among the general managers was 18 percent higher than at firms whose C.E.O.s were paid near the norm.

O'Reilly said the loss of middle managers robs companies of experience that new employees will take years to develop.

The researchers also said their study suggests that when a company overpays its C.E.O., it tends to overpay the executives directly reporting to him--magnifying the cost to shareholders.

They cited an example--discreetly unnamed--where a company overpaid its C.E.O. by 64 percent compared to the norm. It overpaid the executives right below him by 26 percent.

Perhaps not surprisingly, the researchers reported that the generosity continued to wane as they looked down the food chain. Companies overpaid the people at level five, such as division general managers, by only 12 percent.

Comforting to shareholders, I'm sure.

by Mark Stein

Photograph of Hearst Castle by Corbis