91吃瓜

CEOs who have been overpaid earlier in their tenures continue to receive the largest raises or smallest pay cuts, according to new research by , assistant professor of management in the University of 91吃瓜鈥檚 .

Lead researcher Wowak, along with Donald Hambrick and Andrew Henderson, examined the relationship between CEO pay and performance over a decade. They looked at 590 big company CEOs who had tenures of at least four years between 1996 and 2005 in their study 鈥�,鈥� which appears in the current issue of the Academy of Management Journal.

There was some year-to-year 鈥渟ettling up鈥� in which prior year pay deviations were partially corrected, but once the researchers took that into account, they found a positive link between earlier overpayment and current year pay raises.

鈥淲e surmised that earlier overpayment could be an indicator of the board鈥檚 ingrained perception of a CEO鈥檚 skill level,鈥� Wowak says. 鈥淭his effect diminishes as CEO tenure advances, however, as boards presumably achieve a better calibration of the CEO鈥檚 true abilities and rely less on earlier pay patterns as the benchmark for the CEO鈥檚 worth.鈥�

The researchers also found that if an 鈥渙verpaid鈥� CEO stumbles, he/she is especially vulnerable to dismissal.

鈥淲e found that overpayment increases the chances that an underperforming CEO will be fired,鈥� Wowak says. 鈥淭his is because overpaid CEOs are held to a higher standard and may be subject to strong retaliatory responses from their boards when they stumble. Economically speaking, boards may conclude that highly overpaid CEOs who deliver poor performance will be unable to ever rebalance the employer-employee ledger, leaving dismissal as the only option.鈥�

For those who would argue the term 鈥渙verpaid CEO鈥� is an oxymoron, Wowak explains they examined the degree to which a CEO was overpaid or underpaid relative to other CEOs in the labor market. With that in mind, a CEO earning $4 million who should be making $6 million is considered underpaid, while a CEO making $4 million who should be earning $2 million is overpaid.

鈥淚t鈥檚 really an issue of the degree to which a CEO makes more or less than the 鈥榞oing rate鈥� for an average CEO leading a company of a given size, within a given industry,鈥� he says. 鈥淎ll CEOs are well-paid compared to most of us 鈥� the median annual pay was around $2.6 million, although the variance was substantial. It鈥檚 a question of how much a CEO鈥檚 pay deviates from what labor market norms predict he or she should be paid based on contextual factors.鈥�

Wowak specializes in strategic management with a focus on top executives and their effects on organizational outcomes.