Underpaid CEOs more likely to fire staff: Study

CEOs who are paid less than their peers are four times more likely to engage in layoffs, a study has found.

Researchers from Binghamton University in the US analysed data that included CEO pay and layoff announcements made by S&P 500 firms from 1992-2014 in the financial services, consumer staples and IT industries.

Adjusting the analysis for a number of different factors that could influence a layoff -- such as industry conditions, company size, firm performance -- researchers found that the "underpaid" CEOs were four times more likely to announce a layoff.

"In terms of strategic decisions that a CEO can make that could lead to higher pay, layoffs are one of the easiest to do," said Scott Bentley, an assistant professor at Binghamton University.

"Relative to other decisions such as mergers or acquisitions, layoffs typically don't need the approval of shareholders, the board or regulators, and they don't take years to do. Layoffs can be determined overnight," said Bentley.

"In a way, CEOs are just like any other type of employee. They are going to compare their pay to those around them," Bentley said.

"The difference is that the average employee can't make strategic decisions for the company that influences their own pay. Executives can," he said.

The relationship between lower pay and the likelihood of layoffs all but disappears when a CEO is paid more than his or her peers, researchers said.

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"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," Bentley said.

On average, researchers found CEO pay generally increased in the year following a layoff when firm performance also improved.

"While there are some instances where pay increased when performance decreased, we found that if the company and the shareholders don't benefit from the layoffs, neither does the CEO in most cases," Bentley said.

The findings highlight the importance of corporate governance and aligning 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," he said.