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Stephen Brammer is Professor of Strategy and Associate Dean for Research at Warwick Business School. Presented in partnership withe Sustainable Business Institute at the University of Edinburgh Business School.
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Warwick Business School
Reputational Assessments of Executive Remuneration: CEOs as Celebrities, Managers, Villains or Hallmarks of Quality Edinburgh University Business School 13th February, 2013
Stephen Brammer, Warwick Business School
Warwick Business School
Aims To explore the relationship between corporate
reputation and executive pay – to showcase some (very) new empirical evidence
Are Executive Pay and Reputation related? How are Executive Pay and Reputation related? Why are Executive Pay and Reputation related?
Warwick Business School
Why bother?
Warwick Business School
Why bother?
Warwick Business School
Why bother? In October 2008, the CEO of Lehman Brothers, Richard S Fuld, argued over pay with Congressman Henry Waxman during public hearings on the bankruptcy. Fuld insisted he had taken "only" $310m in compensation during the seven years before 2008.
Warwick Business School
Why bother?
Warwick Business School
Why bother?
Warwick Business School
Why bother?
Warwick Business School
Why bother?At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10 per cent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen.
Warwick Business School
Why bother?
Warwick Business School
So…… Discussion of executive pay provokes strong opinions There seems to be an emerging consensus that the
levels, and (un)fairness, of executive pay are socially problematic
The number of shareholder revolts, negative media reports, etc also suggest that pay is something external audiences are sensitive to and which might be reputationally relevant
How is executive pay perceived externally? What are its effects on reputation?
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Theorising the pay-reputation link Legitimacy theory? (perhaps high pay is bad, especially
when it’s unusual relative to other companies, not a reward for good performance, and out of line with rank and file pay?)
Agency theory? (Perhaps high pay is bad, as it reflects agency problems?)
Stakeholder theory? (Perhaps high pay reflects abuses of managerial power relative to other stakeholders?)
Signalling theory? (perhaps high pay is a signal of distinctive skills, and therefore good? Does the pay signal complement or substitute for other signals?)
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Our analysis – 2 stages First – look at the total pay of CEOs of listed US
companies in the period 2008-2011 Estimate “normal” or “expected” levels of
remuneration by modelling the following relationship:
CEO Payt = f(Firm Sizet-1, Stock Performancet, t-1, Operating Performancet, t-1, Market to Bookt, CEO Tenuret, Gender, Age, Industry Sector)
Calculate % Deviation in actual pay from “normal” pay
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Our analysis – two stages Second – use information about the deviation in
pay from “expected” pay in a model of corporate reputation, drawing upon Fortune WMAC rankings
Estimate how firm reputation is shaped by known influences and unexpected pay:
Reputationt = f(Firm Sizet-1, Stock Performancet-1, Operating Performancet-1, Industry Sector, “excess CEO pay”t-1)
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Findings Firms that consistently “overpay” their CEOs
attract HIGHER REPUTATIONAL ASSSESMENTS, other things being equal
Firms that consistently “underpay” their CEOs attract LOWER REPUTATIONAL ASSSESMENTS, other things being equal
Underpaying has a larger impact – roughly twice the size of the effect of overpaying – overpaying improves your ranking by ≈ 8-10 places, underpaying loses you ≈ 13-15 places
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Findings The positive impact of overpaying on reputation is
reduced when firms have better financial performance
The negative impact of underpaying on reputation is reduced when firms have better financial performance
Firm size does not moderate the relationship between pay patterns and reputation
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Findings The negative impact of underpaying on
reputation is greater when CEO remuneration is composed of a higher % of base salary
The positive impact of overpaying on reputation is reduced when firms have a higher CEO/Rank and File Pay multiple
The negative impact of underpaying on reputation is further compounded when firms have a higher CEO/Rank and File Pay multiple
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So what? Executive pay is a significiant reputational issue –
but not perhaps in the anticipated fashion – the bigger risk in pay is associated with underpaying
What does this tell us about how pay is being interpreted by reputational assessors?
High pay seems to send positive signals to assessors – perhaps about firms’ confidence in their future financial performance – when strong alternative signals about performance are present, the signalling value of pay weakens
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So what? Our measure of reputation – the Fortune index –
is known to be biased towards a “financial” focus One thing our findings show is that negative
popular and political sentiment regarding executive pay is not shared by the financial community
Perceived inequality is also a reputational issue – where the CEO/Rank and file multiple is higher, reputations are at risk
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Summary/Conclusions Pay practices shape firms’ reputations to a
significant extent – the level, composition, and perceived fairness of pay all matter for how firms are evaluated
Underpaying a CEO generates substantial reputational harm, while overpaying generates a reputational halo, especially if performance metrics are weak
Further work will explore other potential moderators – governance, for example.
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