Is there fire? Executive compensation and employee attitudes

Abstract

Purpose: This paper aims to examine the relationship between CEO compensation and employee attitudes. Design/methodology/approach: Based upon equity/organizational justice theories and the CEO compensation literature, hypotheses were developed which suggest that executive compensation and employee attitudes will be related. These hypotheses were tested by linking a large-scale survey of employee attitudes to CEO compensation data for public companies based in the USA. Findings: Employee attitudes appear to be related to some measures of CEO compensation, although sometimes the relationship that was found was negative and sometimes it was positive, but in all cases the effect size was quite small. Specifically, change in CEO salary was negatively related to evaluation of senior management and general satisfaction. However, change in total CEO compensation was positively related to evaluation of senior management and general satisfaction, while CEO bonus level was positively related to general satisfaction. Research limitations/implications: Limitations of this study include the inability to show a causal relationship, limited external validity, equations that explain only a small amount of variance and attitudinal measures that are single source. Future research which helps understand what employees know and why differences across organizations exist would be helpful. Practical implications: From an employee attitude perspective, changing performance-based components of CEO compensation (e.g. bonus) is better than changing CEO salary. However, if salary is going to be increased, a communication plan for employees should be developed. Originality/value: Whether executive compensation has an impact on employees' attitudes has not been explored previously.