Overpaid CEOs and Underpaid Managers: Equity and Executive Compensation

Overpaid CEOs and Underpaid Managers: Equity and Executive Compensation

By Tim Pollock, James Wade, Charles A. O’Reilly
1996Working Paper No. 1410

Much previous research on executive compensation has been predicated on economic theories with their assumptions of the motivational benefits of individual competitiveness among employees. Using a sample of over 120 large public companies over a five year period, results of this study show the negative consequences of inequity in the CEO's pay on the employees at lower levels of the organization. First, the effects of CEO over-and underpayment are shown to cascade down to lower organizational levels. Second, inequity between the CEO's compensation and that of lower managers is associated with higher rates of turnover for these employees. Overall, the findings are consistent with the positive effects of wage compression in salaries Theoretical implications for the design of executive compensation are discussed.