Payoffs for layoffs? An examination of CEO relative pay and firm performance surrounding layoff announcements

• Published in: Personnel psychology Vol. 72; no. 1; pp. 81 - 106
• Main Authors: Bentley, F. Scott, Fulmer, Ingrid S., Kehoe, Rebecca R.
• Format: Journal Article
• Language: English
• Published: Durham Blackwell Publishing Ltd 01.03.2019
• Subjects: CEO pay; Chief executive officers; Comparative studies; firm performance; Human resource management; layoffs; Peers; Programmers; social comparisons
• ISSN: 0031-5826; 1744-6570
• DOI: 10.1111/peps.12293

In this study, we theorize that chief executive officers’ (CEOs’) peer pay comparisons influence their decisions to engage in layoffs, and we consider the conditions under which layoffs deliver “payoffs” in the form of increases in subsequent CEO relative pay. Our results indicate that CEOs receiving compensation below their peers are significantly more likely to announce layoffs in the subsequent year, relative to those receiving compensation above their peers. Further, we find that the relationship between layoffs and subsequent changes in CEO relative pay depends on postlayoff changes in firm performance, with CEOs in firms with the largest performance gains receiving the largest increases in relative pay. We also show that our results are robust to an alternative operationalization of CEO relative pay. We provide evidence that external social comparisons may have predictable consequences for both CEOs’ propensities to engage in particular strategic actions and future changes in CEOs’ relative pay.