Wednesday, September 7, 2016

Republicans in the Board: Leadership Trumps Collective Accomplishment

Facebook is the quintessential small company with high value that are becoming more common in the modern economy. How small is small? As of December 2015, it employs 12,000. What about Google? 57,000 employees. And if we turn to the other side of the modern economy, services, we find that Walgreens has 240,000 employees – I am deliberately not showing Walgreens instead of Walmart because we all know that Walmart is a giant firm. Taking the step back into industry, the formerly dominant part of the economy, Ford Motors has 199,000 employees (again I am not picking the largest, which would be GM).

When these firms do well – or poorly – who do we credit or blame? The answer is surprisingly political. In a recent study of executive compensation published in Administrative Science Quarterly, Abhinav Gupta and Adam Wowak examine whether the different views of leadership held by Republicans and Democrats affect how Chief Executive Officers get paid. The idea is simple – members of the board of directors determine how much the CEO gets paid, and they reveal their political views through donations to the parties (naturally they can donate to none, one, or both). If the board members believe that CEOs are largely responsible for what ten to hundred thousand people do, they will pay the CEOs more on average, and they will also make the pay more sharply dependent on the company's recent performance.

It is not a secret that Democrats attribute a lot of credit to the collective effort of workers and managers, and less to the CEO. What has become clear recently is that there is a clear authoritative streak in the Republican Party, and accordingly a tendency to credit the results to the CEO. Do the results of the study bear this out? Abundantly. A Republican dominance of a board leads to higher CEO pay. It also leads to more dependence of the CEO compensation on accounting profit and stock market value increase. Even more revealing: these relations are stronger when the analysis is limited to the compensation committee, which is the subgroup of the board that determines CEO pay (usually with the help of consultants).

So now we know that CEO pay is political, in additional to the earlier findings showing that it is customary and performance dependent. Does that make CEO pay unfair? Well, actually the answer to that is political too. Consider how you feel about this issue; it probably fits your political views in general.


No comments:

Post a Comment