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Friday, March 22, 2019

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Taekjin Shin, a management professor in SDSU’s Fowler College of Business, studied the relationship between shareholder-friendly language and CEO pay increases. Taekjin Shin, a management professor in SDSU’s Fowler College of Business, studied the relationship between shareholder-friendly language and CEO pay increases.

Magic Words That Result in CEO Pay Raises

Research by an SDSU management professor finds shareholder-friendly language is the key to pay increases.
By Suzanne Finch

What if two magic words could raise your salary by more than $116,000 per year?

New research by Taekjin Shin, a management professor in San Diego State University’s Fowler College of Business, found that when a CEO repeated the words “shareholder value” at least once every 1,000 words within a written communication to board members, his or her compensation rose by an average of $116,000 per year. The research, co-authored by Jihae You from Louisiana State University, was recently published ahead of print in the Journal of Management Studies.

The researchers determined the CEO’s resulting pay increase occurred even when the message to board members was crafted by an author other than the CEO.

“Although the CEOs may not necessarily write letters personally, once they are signed by the CEO and appear in a public domain, they are widely considered as messages from the CEO,” the co-authors wrote in the study.

Executive pay raises are usually done at the behest of the corporation’s board of directors, whose members generally hold positions elsewhere or serve on multiple boards.

“In theory, directors are presumed to monitor management behavior closely and determine executive compensation based on objective information,” said Shin. “In reality, though, the directors’ time and energy are split between other board responsibilities and their own companies, meaning they don’t have time to sort through the objective data on corporate operations.”

Additionally, Shin and You found that because much of the data given to board members is complicated or incomplete, they may rely on the information in CEO letters and other communications that is generally easier to interpret in order to form opinions about management performance.

“A typical director holds a fraction of the shares of the corporate boards where they serve,” said Shin. “Our study indicated when the CEO’s use of language is shareholder-friendly, it may leave an impression of management competence and effectiveness. Directors with this impression often end up granting a more generous pay package to the CEO.”

One might deduce that “activist shareholders,” who may want to replace the CEO, could take advantage of these same tendencies, the researchers note. An activist shareholder is defined as someone who obtains a large portion of a company’s shares with the intention of advocating for corporate change to improve stock performance. By crafting messages to board members that suggest instability and lack of anxiety about a company’s direction, such shareholders could undermine the board’s confidence in a CEO.

“Close examination of corporate performance by activist shareholders may create a sense of urgency and threat among board members who rely on corporate messaging to determine management compensation,” Shin noted. “We found that the shareholder-friendly language becomes even more useful for CEOs targeted by activist shareholders, resulting in a stronger impact of the language on pay increases.”