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CEOs of the top 350 firms averaged $14.1 million per year, or 273 times more than the average worker, according to The Washington Post. Is CEO compensation fair?
A team of Harbert College of Business researchers answered the question in a paper “Dollars and sense: The implications of CEO compensation for organizational performance” accepted for publication by Business Horizons.
It is the first published research paper under the "Raymond J. Harbert College of Business" banner.
“It’s quite an honor,” said Shelley A. Davis, a doctoral student and graduate teaching assistant in management. “It’s the first paper that I have submitted, so I’m doubly excited.”
Davis teamed with doctoral candidate Jason D. DeBode and Dave Ketchen, Lowder Eminent Scholar and management professor, on the project.
Joe Hanna, Associate Dean for Research and Outreach and Regions Bank Professor believes the college’s reputation for conducting high-quality research “is very solid and improving daily.”
“Clearly the recent naming gift by Mr. Harbert will only serve to support and accelerate this trend,” Hanna said. “Most faculty of the Harbert College of Business allocate their work hours to serve the tri-fold mission of Auburn University, which is to contribute to instruction, research, and outreach. Research is a significant portion of the typical faculty member’s workload, encompassing roughly 50 percent of their overall duties. Faculty publish their work in a wide variety of outlets, including top academic journals of their discipline, practitioner journals, research reports and others.”
Hanna noted that the main purpose of research is “for the faculty member to effectively communicate the purpose and results of the research they conduct.”
Ketchen, DeBode and Davis’ paper was nearly accepted for publication without the banner “Harbert College” until the management professor stepped in. Ketchen said he asked editors to update the name of the college on the submitted paper before publication, and they obliged.
“The journal (Business Horizons) put the proofs together before the naming gift,” he explained. “I asked them to see if they could update the name to give Mr. Harbert the credit he deserves.” Davis, who is concentrating her doctoral work on Organization Studies Strategies and Change, noted the idea for the journal article stemmed from television news.
“As I was watching the news, I saw something about astronomical CEO pay,” said Davis, a former forensic chemist at the Georgia Bureau of Investigation. “That sparked interest and I began thinking about some of the management theories we discussed in class (Ketchen’s Organizational Theory seminar). More theories added more insight into CEO pay.”
What began as an idea turned into a class paper, then a full-blown research paper worthy of publication.
The six-page paper listed seven suggestions a board of directors can use to maximize a CEO’s chances to put “the firm in the best position to be successful.” They include 1) creating strong incentives for the CEO; 2) benchmarking CEO performance and compensation relative to peer CEOs; 3) understanding and responding to CEOs’ thoughts on equity related to peer CEOs; 4) paying a CEO with “uniquely valuable knowledge, skills, and they ability at the top of their market”; 5) offering retention incentives; 6) do not simply imitate compensation packages at rival firms; and 7) consider CEO candidates’ social ties during recruitment.
"We often see stories in the popular press that highlight such excessive compensation packages and questioning their widespread use," DeBode said. "By offering suggestions for how to construct CEO compensation packages, I think one of our goals was to better inform readers as to why these executives might have such high compensation packages and when to/not to use them."
The team offered insight from a number of management theories (agency, social comparison, equity, resource-based, institutional and social network) to make the report. High CEO pay, according to the report, often makes sense. Ketchen said DeBode "helped Shelley tease out the implications of various theories for CEO compensation."
“Defenders of high CEO pay point to skilled CEOs’ ability to lead their organizations to exceptionally strong performance,” the report reads. “From their perspective, paying a CEO many millions of dollars annually is a great investment if the CEO rescues a struggling firm from doom or increases a solid company’s profits dramatically.”
“In a lot of cases, the pay is justified,” Davis said. “But in some situations, I don’t think CEOs deserve what they are paid.”
Ketchen says the management department “encourages doctoral students to take their class papers and try to publish them.
“What separates us from community colleges and regional schools is at those schools they do a great job of disseminating knowledge – but we do that and we create knowledge too," he said. "If the taxpayers are going to invest many millions of dollars into Auburn, then they should be getting a great bang for their buck. They should know why some businesses are effective and why some are not effective. Research at the Harbert College of Business answers those questions.”