HANOVER, MD, September 25, 2006--Executive compensation scholars have released new, breakthrough research analyzing perceptions of fairness in executive pay and how CEO over- or underpayment cascades down to lower organizational levels.
The paper, "Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation," looked at data from over 120 firms over a five-year period and is the most comprehensive study of its kind to be conducted. Authored by James B. Wade at Rutgers University, Charles A. O'Reilly, III at Stanford's Graduate School of Business, and Timothy G. Pollock at Pennsylvania State University's Smeal College of Business, it will be published in the September/October 2006 issue of Organization Science.
The techniques of Operations Research (O.R.), the discipline of applying advanced analytical methods to help make better decisions, drove the analysis that appears in the paper. Among the key findings:
Professor Charles O'Reilly, a co-author at the Stanford Graduate School of Business, notes "Given the large sums paid to some senior executives, the total cost for overpayment could be a big number – and, in some cases, significantly affect shareholder returns."
"CEO compensation impacts employee retention more than we realized," says lead author James B. Wade at Rutgers University. "Our research found that CEO overpayment is related to turnover, which can have important long-term consequences. It is quite possible that those most likely to leave because of perceived unfairness are precisely those employees coming up in the organization that would eventually rise to the top management team (TMT) level."
"Our research shows evidence that CEOs are concerned with fairness, and that they are likelier to share rewards than they are to share burdens," says co-author Timothy Pollock of Penn State University. "But this can be expensive and has the potential to hurt a firm's bench strength if the rewards aren't fully shared."
For more information or to arrange a briefing, please contact Doug Russell or Chuck Tanowitz at Schwartz Communications at (781) 684-0770 or by email at INFORMS@schwartz-pr.com.
About Organization Science and INFORMS
Organization Science is a publication of the Institute for Operations Research and the Management Sciences (INFORMS®). INFORMS is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org. More information about operations research is at www.scienceofbetter.org.
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