NCPA - National Center for Policy Analysis

The Myth That Executives Are Rewarded For Layoffs

November 2, 1998

When a company lays off workers, are some of the cost savings lavished on the Chief Executive Officer in the form of a pay increase? That's a charge sometimes heard, but it's a myth, according to Kevin F. Hallock of the University of Illinois.

In a study published in the American Economic Review, Hallock analyzed the compensation of some 550 of America's highest-paid CEOs from 1989 to 1995. At first there did appear to be a connection between layoffs and pay hikes, but that was due to a company's size. The largest companies were also the most likely to announce layoffs.

Once adjustments were made to reflect the effect of a company's size on the probability of layoffs, here's what he found:

  • The apparent gain a CEO might reap from a layoff program fell sharply.
  • Once other variables were factored into the equation -- such as a CEO's age and tenure -- there was no relationship at all between layoffs and subsequent pay hikes
  • Indeed, layoff announcements tended on average to slightly depress a company's stock price.

The idea that CEOs have gained financially from layoff decisions, Hallock says, "just isn't supported by the evidence."

 

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