ANDERSON FACULTY MEMBER RELEASES MAJOR STUDY
May 15, 2000
Silva's work, which resulted from a survey of more than 200 compensation officers of American corporations, shows that strong CEOs garner high salaries as shareholders in the companies that they lead.
Most people are intimidated by asking for a raise, so imagine how much easier it would be if you could pick your boss, set his pay and be almost guaranteed a glowing job evaluation - regardless of whether you actually did a good job. Many of America's chief executive officers enjoy just such a luxury, according to the study that Silva authored as her PhD dissertation at the University of Florida.
With recent sureys placing the average annual CEO salary at roughly $12 million - about 750 times that of the typical blue-collar worker - the news media, the public and the Securities and Exchange Commission are paying ever-increasing attention to CEO salaries. Against that backdrop, Silva said, boards of directors are under more pressure than ever to justify and explain how they evaluate CEOs. Since performance-based criteria are more likely to put the interests of management in line with those of the shareholders, she said, subjective behavior-based criteria should be given less weight.
However, Silva's study shows that in the case of powerful CEOs, who may be at the helm of nearly half of America's corporations, that's not happening. "By understanding the performance evaluation process," Silva writes, "it may be possible to discern how CEO pay decisions are made, and maybe provide some answers to the public outcries for justification of CEO salaries." Silva's survey sought to determine whether CEOs are evaluated differently in firms where CEOs were very powerful than in firms where stockholders hold the reins.
Silva found that when the CEO and management both were more powerful than stockholders, the CEO's evaluation was less likely to be tied to the company's financial performance and more likely to be qualitative and subjective. Furthermore, the CEOs in those companies were more likely to be chairmen and chairwomen of the board, giving them exceptional leverage in determining how they would be evaluated and who else would be on the board.
On the other hand, in companies in which owners - shareholders - were strong, CEOs had far less say in how their performance would be rated, the study showed. In those firms, the predominant criteria was financial performace, and more subjective factors such as "leadership" or "managerial skill" had secondary importance.
Silva's research will appear in Administrative Science Quarterly.
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