Stephen Brammer: Reputational Assessments of Executive Renumeration (13.2.13)

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Stephen Brammer is Professor of Strategy and Associate Dean for Research at Warwick Business School. Presented in partnership withe Sustainable Business Institute at the University of Edinburgh …

Stephen Brammer is Professor of Strategy and Associate Dean for Research at Warwick Business School. Presented in partnership withe Sustainable Business Institute at the University of Edinburgh Business School.

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  • 1. Warwick Business School
  • 2. Aims To explore the relationship between corporate reputation and executive pay – to showcase some (very) new empirical evidence Are Executive Pay and Reputation related? How are Executive Pay and Reputation related? Why are Executive Pay and Reputation related?Warwick Business School
  • 3. Why bother?Warwick Business School
  • 4. Why bother?Warwick Business School
  • 5. Why bother? In October 2008, the CEO of Lehman Brothers, Richard S Fuld, argued over pay with Congressman Henry Waxman during public hearings on theWarwick Business School bankruptcy.
  • 6. Why bother?Warwick Business School
  • 7. Why bother?Warwick Business School
  • 8. Why bother?Warwick Business School
  • 9. Why bother? At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10 per cent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen.Warwick Business School
  • 10. Why bother?Warwick Business School
  • 11. So…… Discussion of executive pay provokes strong opinions There seems to be an emerging consensus that the levels, and (un)fairness, of executive pay are socially problematic The number of shareholder revolts, negative media reports, etc also suggest that pay is something external audiences are sensitive to and which might be reputationally relevant How is executive pay perceived externally? What are its effects on reputation?Warwick Business School
  • 12. Theorising the pay-reputation link Legitimacy theory? (perhaps high pay is bad, especially when it’s unusual relative to other companies, not a reward for good performance, and out of line with rank and file pay?) Agency theory? (Perhaps high pay is bad, as it reflects agency problems?) Stakeholder theory? (Perhaps high pay reflects abuses of managerial power relative to other stakeholders?) Signalling theory? (perhaps high pay is a signal of distinctive skills, and therefore good? Does the pay signal complement or substitute for other signals?)Warwick Business School
  • 13. Our analysis – 2 stages First – look at the total pay of CEOs of listed US companies in the period 2008-2011 Estimate “normal” or “expected” levels of remuneration by modelling the following relationship: CEO Payt = f(Firm Sizet-1, Stock Performancet, t-1, Operating Performancet, t-1, Market to Bookt, CEO Tenuret, Gender, Age, Industry Sector) Calculate % Deviation in actual pay from “normal” payWarwick Business School
  • 14. Our analysis – two stages Second – use information about the deviation in pay from “expected” pay in a model of corporate reputation, drawing upon Fortune WMAC rankings Estimate how firm reputation is shaped by known influences and unexpected pay: Reputationt = f(Firm Sizet-1, Stock Performancet-1, Operating Performancet-1, Industry Sector, “excess CEO pay”t-1)Warwick Business School
  • 15. Findings Firms that consistently “overpay” their CEOs attract HIGHER REPUTATIONAL ASSSESMENTS, other things being equal Firms that consistently “underpay” their CEOs attract LOWER REPUTATIONAL ASSSESMENTS, other things being equal Underpaying has a larger impact – roughly twice the size of the effect of overpaying – overpaying improves your ranking by ≈ 8-10 places, underpaying loses you ≈ 13-15 placesWarwick Business School
  • 16. Findings The positive impact of overpaying on reputation is reduced when firms have better financial performance The negative impact of underpaying on reputation is reduced when firms have better financial performance Firm size does not moderate the relationship between pay patterns and reputationWarwick Business School
  • 17. Findings The negative impact of underpaying on reputation is greater when CEO remuneration is composed of a higher % of base salary The positive impact of overpaying on reputation is reduced when firms have a higher CEO/Rank and File Pay multiple The negative impact of underpaying on reputation is further compounded when firms have a higher CEO/Rank and File Pay multipleWarwick Business School
  • 18. So what? Executive pay is a significiant reputational issue – but not perhaps in the anticipated fashion – the bigger risk in pay is associated with underpaying What does this tell us about how pay is being interpreted by reputational assessors? High pay seems to send positive signals to assessors – perhaps about firms’ confidence in their future financial performance – when strong alternative signals about performance are present, the signalling value of pay weakensWarwick Business School
  • 19. So what? Our measure of reputation – the Fortune index – is known to be biased towards a “financial” focus One thing our findings show is that negative popular and political sentiment regarding executive pay is not shared by the financial community Perceived inequality is also a reputational issue – where the CEO/Rank and file multiple is higher, reputations are at riskWarwick Business School
  • 20. Summary/Conclusions Pay practices shape firms’ reputations to a significant extent – the level, composition, and perceived fairness of pay all matter for how firms are evaluated Underpaying a CEO generates substantial reputational harm, while overpaying generates a reputational halo, especially if performance metrics are weak Further work will explore other potential moderators – governance, for example.Warwick Business School
  • 21. Warwick Business School