Underpaid CEOs tend to engage more in layoffs: Study

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New York : CEOs who are paid lesser than their peers are four times more likely to engage in layoffs, a new research has found.

The research, led by a team at the Birmingham University, State University of New York, found that the relationship between lower pay and the likelihood of layoffs nearly disappeared when a CEO was paid more than his or her peers.

"In terms of strategic decisions that a CEO can make that could lead to higher pay, layoffs are one of the easiest to do," said Scott Bentley, Assistant Professor of Strategy at Birmingham University's School of Management.

"Relative to other decisions such as mergers or acquisitions, layoffs typically don't need the approval of shareholders, the board or regulators, and they don't take years to do. Layoffs can be determined overnight," he added.

On an average, the researchers found that CEO pay generally increased in the year following a layoff when firm performance also improved.

The findings, published in the journal Personnel Psychology, highlighted the importance of corporate governance and aligning the interests of the CEO with shareholders and employees.

The team analysed data that included CEO pay and layoff announcements made by S&P 500 firms in the financial services, consumer staples and IT industries.

Adjusting the analysis for a number of different factors that could influence a layoff (industry conditions, company size, firm performance, etc.), they found that the "underpaid" CEOs were four times more likely to announce a layoff.

"In a way, CEOs are just like any other type of employee. They are going to compare their pay to those around them," Bentley said.

"The difference is that the average employee can't make strategic decisions for the company that influences their own pay, executives can," he noted.