Do CEOs Expect Payoffs from Layoffs? The Relationship Between CEO Relative Pay and Layoffs

Executives, boards of directors, and compensation consultants actively use peer comparisons for constructing compensation benchmarks. However, the implications associated with relative measures of executive compensation have received little attention from the executive compensation research to date. Social comparison, tournament, and prospect theories are used to develop hypotheses concerning the relationship between CEO relative total compensation and layoffs. Utilizing a sample of large, publicly traded companies, I test hypotheses predicting future layoff announcements as a function of CEO relative total compensation. I find that CEOs receiving compensation below their annual industry median are significantly more likely to engage in layoffs than their peers at or above the industry median. Similarly, firms performing below the annual industry median are also more likely to announce future layoffs in the following year. Additional results indicate that while previously under-performing firms benefit from layoffs in terms of increased performance in the following year, executives receiving compensation below the annual industry median and engage in layoffs do not see similar increases in the following year.