Study: Highest-Paid CEOs Get Largest Raises

CEOs
who have been overpaid earlier in their tenures continue to receive the largest
raises or smallest pay cuts, according to new research by Adam Wowak, assistant
professor of management in the University of Notre Dame’s Mendoza College of
Business.

Lead
researcher Wowak, along with Donald Hambrick and Andrew Henderson, examined the
relationship between CEO pay and performance over a decade. They looked at 590
big company CEOs who had tenures of at least four years between 1996 and 2005
in their study “Do CEOs Encounter Within-Tenure Settling Up? A Multi-period
Perspective on Executive Pay and Dismissal,” which appears in the current issue
of the Academy of Management Journal.

There
was some year-to-year “settling up” in which prior year pay deviations were
partially corrected, but once the researchers took that into account, they
found a positive link between earlier overpayment and current year pay raises.

“We
surmised that earlier overpayment could be an indicator of the board’s
ingrained perception of a CEO’s skill level,” Wowak says. “This effect
diminishes as CEO tenure advances, however, as boards presumably achieve a
better calibration of the CEO’s true abilities and rely less on earlier pay
patterns as the benchmark for the CEO’s worth.”

The
researchers also found that if an “overpaid” CEO stumbles, he/she is especially
vulnerable to dismissal.

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