The amount of money CEOs are paid has been an ongoing area of concern for many activists for some time, especially as the gap between what those at the top are paid and the rest of the workers continues to grow.

A recent study from Binghamton University suggests that the gap between what the boss is paid and what the average worker is paid has a big impact on how that CEO behaves, especially when it comes to laying off staff.

Whilst we might expect overpaid bosses to be narcissists with little regard for others, the reverse counter intuitively seems to be the case.  The research found that CEOs who are paid less than their peers are much less likely to layoff workers during bad times.

“In terms of strategic decisions that a CEO can make that could lead to higher pay, layoffs are one of the easiest to do,” the authors say. “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.”

Shedding workers

The researchers compared data about CEO pay at S&P 500 firms with layoff announcements made by those organizations between 1992-2014.  They adjusted for various factors that could influence layoffs, including company size and the performance of the firm, and found that CEOs who were ‘underpaid’ relative to their peers, 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,” the authors say. “The difference is that the average employee can’t make strategic decisions for the company that influences their own pay. Executives can.”

As soon as the CEO becomes paid about the same as their peers, this effect appears to vanish.  The researchers then explored whether these actions actually pay off for CEOs, or in other words, did the layoffs boost the pay of those earning below their peers?  Sadly, it appears as though it did, with CEO pay increasing in the year after the layoffs.

“While there are some instances where pay increased when performance decreased, we found that if the company and the shareholders don’t benefit from the layoffs, neither does the CEO in most cases,” the researchers explain.

The researchers believe that their work underlines the importance of aligning the interests of the CEO with that of the shareholders and employees.  If they’re not aligned, then damaging behaviors can emerge.