This Article Full Text (PDF) References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via HighWire Citing Articles via Google Scholar Google Scholar Articles by Wade, J. B. Articles by Pollock, T. G. Search for Related Content

Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation

Rutgers Business School, Rutgers University, 111 Washington Street, Newark, New Jersey 01702-3027
Graduate School of Business, Stanford University, Stanford, California 94305
Smeal College of Business, Pennsylvania State University, 417 Business Building, University Park, Pennsylvania 16802
jwade{at}rbsmail.rutgers.edu
coreilly{at}stanford.edu
tpollock{at}psu.edu

In this study we propose that norms of fairness are salient to top decision makers and show that over- or underpayment of the CEO cascades down to lower organizational levels. Moreover, it appears that CEOs use their own power not only to increase their own salaries, but also those of their subordinates. One implication of such a process may be that the overpayment of a top executive has higher costs than have previously been realized. We also find evidence suggesting that CEOs serve as a key referent for employees in determining whether their own situation is "fair," and this influences their reactions to their own compensation. More specifically, we find that when lower-level managers are underpaid relative to the CEO—that is, underpaid more than the CEO or overpaid less—they are more likely to leave the organization. Results obtained from testing our hypotheses on a sample of more than 120 firms over a five-year period demonstrates the importance of considering fairness in the setting of CEO pay. Implications for the design of executive compensation packages are discussed.

Key Words: executive compensation; equity; fairness; top management teams; corporate governance; turnover; power

This article has been cited by other articles:

				C. E. Devers, G. McNamara, R. M. Wiseman, and M. Arrfelt Moving Closer to the Action: Examining Compensation Design Effects on Firm Risk Organization Science, July 1, 2008; 19(4): 548 - 566. [Abstract] [PDF]

				S. D. Graffin, J. B. Wade, J. F. Porac, and R. C. McNamee The Impact of CEO Status Diffusion on the Economic Outcomes of Other Senior Managers Organization Science, May 1, 2008; 19(3): 457 - 474. [Abstract] [PDF]

				C. E. Devers, A. A. Cannella JR, G. P. Reilly, and M. E. Yoder Executive Compensation: A Multidisciplinary Review of Recent Developments Journal of Management, December 1, 2007; 33(6): 1016 - 1072. [Abstract] [PDF]