Published at 2020, June 18th
A study published in the Journal of Management shows the link between the remuneration of business executives and the resilience of their businesses.
The subject of executive compensation is very often at the heart of the debates on inequality or corporate responsibility. Are high-level managers and C-level execs overpaid? What is the acceptable salary gap between a company’s directors and its employees? Are the high salaries of managers acceptable if companies cut costs by laying off employees?
In general, there is not enough data to objectively answer these questions. But more and more, many fields of research in management seek to understand how the attitude and the action of business leaders affect organizations’ functioning. And compensation is an issue increasingly studied.
A recent study published in the Journal of Management explores the links between executives’ compensation and the resilience of the companies they run in the event of a crisis. Their findings? The companies with the highest-paid execs are often less dedicated, less resilient, and ultimately, more ineffective in the event of a crisis.
The Link Between High Compensation and CSR Commitment
The researchers made a sample of nearly 300 listed companies and analyzed the links between executive compensation and their performance on certain issues such as CSR or the resilience of the firms at the time of the 2008 economic crisis.
Their work showed that the better-paid managers are, the less the company tends to invest in social and environmental issues (CSR issues). As a result, the company is generally less prepared to face systemic shocks. In fact, some examples of this can be found in the way many companies reacted to the 2008 financial crisis.
According to the researchers, the significant remuneration of certain leaders is the sign of a certain form of “greed”. Indeed, CEOs and high level executives have a significant influence in establishing their own remuneration, in particular exceptional remuneration. But is this something good?
Compensation: A Sign of Executives’ “Greed”
The remuneration of high-level executives can sometimes be disproportionately higher compared to other managers in similar companies. In these cases, there’s a high (and real) risk these executives are having greedy behaviors and seeking to maximize their own wealth. This becomes even more obvious when part of the compensation comes from bonuses that are unrelated to a company’s performance.
Researchers then observed the companies led by such executives tend to have lower budgets to develop sustainability actions or to develop impact analysis that would be important to decrease long-term business risks. Instead, these execs are looking to maximize their own earnings and more they are reluctant to invest in initiatives that don’t maximize short-term profit.
In this way, it is safe to say that a top exec with a disproportionally high remuneration tends to undermine a firm’s long-term resilience. And there’s likely a positive feedback loop: greedy executives are better paid, and large rewards tend to increase their greed.
Executive Compensation, Resilience, and Responding to Crises
The study’s researchers even further as to say that the existence of significant bonuses in executive compensation is a lever that encourages executives to neglect their stakeholders and CSR investments.
It is, therefore, a way to modulate the commitment of companies: if the compensation of managers was less strongly linked to short-term performance, they would have a greater interest in long-term issues. As a result, the sacrifice of sustainable-development initiatives over short-term profitability would likely decrease.
As a result, companies would then be more likely to become more resilient, more committed, and less fragile in the event of a crisis… Like the one we are currently experiencing.
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