Topic: Leadership, Compensation
Publication: Academy of Management Journal
Article: Do CEOs Encounter Within-Tenure Settling Up? A Multiperiod Perspective on Executive Pay and Dismissal
Authors: Wowak, A.J., Hambrick, D.C., & Henderson, A.D.
Reviewer: Neil Morelli
Past studies have found a significant yet modest relationship between CEO pay and performance. In an effort to challenge this finding, Wowak, Hambrick, and Henderson tested whether a multiperiod “settling up” view should be taken when defining the pay to performance relationship, rather than the more common cross-sectional snapshot. According to the authors, settling up is when executive boards dynamically adjust current pay according to historical performance.
Wowak et al. specifically examined firm performance (based on total shareholder return and return on equity), annual pay revision, and a binary dismissal variable for 590 CEOs who had served at least four years and led companies valued at least $10 million. Their analyses showed that boards do consider past track records of performance and pay history in determining current pay, as opposed to only considering current performance. Also, the level of over(under)payment preceding a given year was negatively related to the current year’s pay revision.
In response to researchers, and occasionally the public, scratching their collective heads about the functions of CEO pay, Wowak et al. offer a new perspective. Apparently, it isn’t just the present, but also the past that helps determine the rewards and punishments of CEO performance.
Wowak, A.J., Hambrick, D.C., & Henderson, A.D. (2011). Do CEOs encounter within- tenure settling up? A multiperiod perspective on executive pay and dismissal. Academy of Management Journal, 54(4), 719-739.