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High CEO pay is bad for business

Bosses with exorbitant pay packets are seen as less effective leaders than their counterparts on lower incomes, and less able to influence those they seek to lead, according to University of Queensland research.

UQ School of Psychology’s Dr Nik Steffens and colleagues studied the outcomes of elevated pay of chief executive officers (CEOs).

“The consequences are all bad: people identify less strongly with a CEO who receives high pay and this reduces their perceived leadership ability and their charisma,” Dr Steffens said.

“It creates an us-versus-them distinction which erodes the CEOs' abilities to connect to, and consequently motivate and inspire, their workers.”

The research comes at a time when shareholder activists and unions are protesting the wage gap and the remuneration of Australia’s highest-paid CEOs.

Dr Steffens said the study called into question traditional organisational views that high pay incentivises leadership.

“While elevated pay is typically justified by a desire to reward and inspire good leadership, it appears that it in fact achieves the very opposite,” he said.

“Incentive and shareholder value models argue that increasing CEO pay ensures that CEOs will more effectively motivate their employees to work to achieve the organisation’s goals.

“However, this analysis focuses only on the motivation of the leaders who receive high pay, not on its effects on the people that leaders are meant to be motivating.

“More recent approaches to leadership show that the ability to influence employees flows from the capacity to create and embed a sense of shared identity within the group that both leaders and followers belong to.

“Clearly it’s difficult for the average employee to have a shared identity with a CEO who earns 50- or 100-times their salary.

“Decisions about CEO remuneration need to balance the need to provide financial motivation for CEOs against the dangers of destroying the shared identity vital for good leadership.”

The research examined the nature of the relationship between CEO pay and people’s personal identification with leaders, including the perceptions of CEO’s identity leadership and charisma.

The research involved two studies – an experiment that examined the impact of high CEO pay on participants’ identification with a hypothetical leader; and an examination of the same perceptions among members of actual organisations.

“The results of the two studies were clear and consistent, and point to the need to revise economic and organisational thinking in this area,” Dr Steffens said.

The research, conducted in collaboration with Professor Alex Haslam, Dr Kim Peters and Professor John Quiggin, is published in The Leadership Quarterly.

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