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May 01, 2007
Pay Imbalances Linked with Higher Turnover

An imbalance in the pay of chief executive officers triggers higher turnover among managers, according to research conducted by Charles O'Reilly, director of the Center for Leadership Development and Research at the Stanford Graduate School of Business.

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For the study, O'Reilly analyzed data from 120 large public companies over a five-year period, tracking five levels of senior managers from vice president to division general manager.

He found one example in which a firm paid the chief executive officer 50 percent more than the industry norm and paid the general managers 50 percent below the industry norm. At the company, O'Reilly found, turnover among the general managers was 18 percent higher than at firms whose chief executive officers were equitably paid.

"People have been trying to justify why CEOs get paid so much," says O'Reilly. "What people haven't been looking at is the consequences of making a wrong decision--paying too much or too little. This study is evidence that there are consequences. Overpayment leads to an increased wage bill. That's money the shareholders would otherwise get. Overpayment of the CEO also leads to turnover at lower levels."

Wage gaps may also increase the tendency for individuals to perceive more inequity than actually exists, says O'Reilly. He recommends that more boards of directors should start looking at executive pay as a social, and not purely economic, corporate issue.

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