January 11, 2023
What Happens When CEOs Take a Pay Cut?
An interesting Forbes article recently took a look at what happens at companies when CEOs take a pay cut. As this excerpt notes, the results were striking:
After a large CEO pay cut, financial performance tends to rebound. Among US firms, the median profitability increases from -8% to 10% in the 3 years following a large cut, according to a study by researchers from Nanyang Technological University, University of Washington, and University of British Columbia.
The profitability improvements in CEO pay-cutting firms are larger than in comparable firms that did not cut the boss’ salary, according to the authors’ analyses. In other words, improvements after a CEO pay cut are not just because the industry is recovering, according to the authors. Firms seem to operate more effectively after a CEO pay cut.
Cutting pay can produce almost as much improvement as replacing the CEO, according to the authors of the study. This tends to be especially likely when the board pairs the pay cut with strong incentives for reversing declining firm performance.
The Forbes article points out that other studies have found that a CEO taking it on the chin when it comes to pay also results in shareholders being more likely to approve future CEO pay packages and increase employees’ willingness to bear an increased workload to help improve company performance.
– John Jenkins