The Elusive Linkage Between CEO Pay and Corporate Performance

Gerry Ledford and Ed Lawler

Purpose: We comment on Aguinis, Martin, Gomez-Mejia, O’Boyle, and Joo (in press). We believe that their hypotheses probably are true, but their methodology is flawed and their data do not support their conclusions.

Design/Methodology: We review and comment on Aguinis et al (in press).

Findings: The data do not adequately demonstrate a power law distribution for CEO performance because the analysis is confounded external conditions affecting performance and the authors use inappropriate dependent variables. The analysis does not demonstrate a power law distribution for CEO pay because the analysis does not take into account changes in pay level and mix over time. The analysis does not show a lack of overlap between the two distributions because it does not take into account the way that CEOs are paid for performance and because it uses CEO pay averaged over CEO tenure.

Research limitations/implications: A more convincing analysis of the authors’ hypothesis would require the use of total shareholder return (TSR) as the dependent variable for organizational performance and would require a number of much more specific controls.

Practical implications: The authors call for greater use of power law thinking by practitioners in setting CEO pay. Their analysis indicates that practitioners already think in power law terms and allocate CEO pay accordingly. Moreover, power law theory and findings could be misused as an excuse for paying average CEOs much more than they are already paid.

Social implications: We add another perspective on CEO pay.

Originality/value: Our perspective is informed both by research and by consulting experience on CEO pay projects.

 


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