Career Development

Does High Pay Equal High Performance?

Much ink has been spilt over the high price of CEOs in America. Over the last fifty years, ratio of CEO-to-worker pay has increased by a factor of ten, much of that increase occurring within the last few decades. In 2014, the average American CEO makes 331 times what the average worker does, and 774 times what full-time minimum wage workers make. In fact, many CEOs compensation plans are so generous they can forgo their base salary without making a dent in their finances, saving tons in taxes. But what are we getting for all that money? The answer may be not nearly enough.

In the Red

That’s the word, according to an SSRN study authored by Professors Michael J. Cooper, Huseyin Gulen, and P. Raghavendra Rau. By studying the stock performance of high-paying companies, they found that CEO pay is negatively related to a company’s future stock returns for up to three years. In other words, once a CEO cracks the top 10% of CEO pay, the company can expect an average 8% drop in stock value for the next three years. The effect is stronger for CEOs who receive higher incentive pay relative to their peers.

Commence Destroying Value

The authors of the paper concluded that this pay-to-performance disparity appears to be “driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.”

These findings are not unique. Another study published in the peer-reviewed organizational journal Interfaces examined the effects of high CEO pay, and found that “higher pay fails to promote better performance.” Professors J. Scott Armstrong and Phillippe Jacquart, the authors of the study, explain:

“Instead, [higher pay] undermines the intrinsic motivation of executives, inhibits their learning, leads them to ignore other stakeholders, and discourages them from considering the long-term effects of their decisions on stakeholders.” [Emphasis ours.]

The Proven Strategy

Intrinsic motivation, or our internal psychological desire to achieve and accomplish things, has been proven to have much more substantial and predictable motivational effects on people than extrinsic motivators like cash and material goods.

However, the raw impact of extrinsic rewards like cash make them excellent short-term motivators, and are great for reaching short-term goals, creating the illusion of lasting effectiveness. Organizations only slip up when they start to favor these short-term motivational gains over long-term motivational strategy.

Have a Heart

Employees of all kinds, even CEOs, have a certain expectation of pay based on industry norms, but once those expectations are met, cash as a motivator can only go so far. Too many pay incentives can morph motivation into a transaction, and that’s when you lose a very important part of success: heart. To truly motivate high performance, the effects of pay incentives shouldn’t overshadow the effects of a simple “thank you” in the workplace.

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