The Consequences of Being Overpaid
How much are your worth? And do you consider yourself overpaid or underpaid? And what does that mean for compensation throughout a career? University of Notre Dame professor, Adam Wowak, at the Mendoza College of Business, has new research that shows CEOs who have been overpaid earlier in their tenures continue to receive the largest raises or smallest pay cuts.
Dr. Wowak said, “We found that earlier overpayment could be an indicator of the board’s ingrained perception of a CEO’s skill level. This effect diminishes as CEO tenure advances, however, as boards presumably achieve a better calibration of the CEO’s true abilities and rely less on earlier pay patterns as the benchmark for the CEO’s worth.”
The study also showed that if an “overpaid” CEO stumbled, he or she was vulnerable to dismissal. “We found that overpayment increases the chances that an underperforming CEO will be fired,” Dr. Wowak said. “This is because overpaid CEOs are held to a higher standard and may be subject to strong retaliatory responses from their boards when they stumble. Economically speaking, boards may conclude that highly overpaid CEOs who deliver poor performance will be unable to ever rebalance the employer-employee ledger, leaving dismissal as the only option.”
No data on whether those “overpaid” perceptions apply to those further down the career ladder.
Tags: corporate executives, executive compensation, job performance, University of Notre Dame
