Study: Profits Go Up When CEOs Make More Than Their Peers

Last Updated Dec 18, 2009 11:48 AM EST

Today's CEO makes 400 times more, on average, than workers at the bottom of the company. But executives at the top seem more concerned with how their compensation compares to their peers at other companies than with how it compares to their coworkers down the chain.

It turns out that a company's profitability is tied to whether its CEO is overpaid, relative to other CEOs within the same industry, according to new research by the University of Florida.
"When CEOs compare themselves with other CEOs in similar conditions and find themselves overpaid or underpaid, they take action to rectify this condition," Henry Tosi, one of the management professors who executed the study, said.

Overpaid CEOs increased a firm's return on its assets and produced greater dividends to stockholders, while underpaid CEOs either ended up leaving (often aided by one of with those "Golden Parachutes") or expanding the size of the company in order to get a bigger salary.

The authors stressed that their study is not meant to justify overpaying CEOs. Salary levels are "egregious" because CEOs are in a unique position to influence the board and "set their own pay."

  • Stefan Deeran

    Stefan Deeran helps environmental nonprofits and green businesses develop and execute their new media campaigns. He also publishes The Exception magazine, a nonpartisan news platform serving his home state of Maine. You can follow him on Twitter @RStefanDeeran or via Facebook.