Warwick Business School
Aims To explore the relationship between corporate  reputation and executive pay – to showcase  some (very) new empirical...
Why bother?Warwick Business School
Why bother?Warwick Business School
Why bother?                          In October                          2008, the CEO                          of Lehman ...
Why bother?Warwick Business School
Why bother?Warwick Business School
Why bother?Warwick Business School
Why bother?                          At a time when the                          global economy                          r...
Why bother?Warwick Business School
So…… Discussion of executive pay provokes strong opinions There seems to be an emerging consensus that the  levels, and ...
Theorising the pay-reputation link Legitimacy theory? (perhaps high pay is bad, especially  when it’s unusual relative to...
Our analysis – 2 stages First – look at the total pay of CEOs of listed US  companies in the period 2008-2011 Estimate “...
Our analysis – two stages Second – use information about the deviation in  pay from “expected” pay in a model of  corpora...
Findings Firms that consistently “overpay” their CEOs  attract HIGHER REPUTATIONAL ASSSESMENTS,  other things being equal...
Findings The positive impact of overpaying on reputation  is reduced when firms have better financial  performance The n...
Findings The negative impact of underpaying on  reputation is greater when CEO remuneration is  composed of a higher % of...
So what? Executive pay is a significiant reputational issue –  but not perhaps in the anticipated fashion – the  bigger r...
So what? Our measure of reputation – the Fortune index –  is known to be biased towards a “financial” focus One thing ou...
Summary/Conclusions Pay practices shape firms’ reputations to a  significant extent – the level, composition, and  percei...
Warwick Business School
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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 Business School.

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Stephen Brammer: Reputational Assessments of Executive Renumeration (13.2.13)

  1. 1. Warwick Business School
  2. 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. 3. Why bother?Warwick Business School
  4. 4. Why bother?Warwick Business School
  5. 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. 6. Why bother?Warwick Business School
  7. 7. Why bother?Warwick Business School
  8. 8. Why bother?Warwick Business School
  9. 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. 10. Why bother?Warwick Business School
  11. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 21. Warwick Business School

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