A recent bit of research quantified the network cost of the executive pay as well as its impact upon turnover. For instance, one finding:
Arguments have been made that even if a CEO is overpaid, a large company can easily absorb the cost. However, the researchers found that CEO pay has direct consequences for compensation at lower employee levels. That’s because the effects of CEO overpayment cascade – at diminishing degrees – down to subordinates. For example, based on their models, where one CEO was overpaid by 64 percent, individuals in his/her company at Level 2 (COO, CFO, etc.) were overpaid by 26 percent, while individuals at Level 5 (division general managers) were overpaid by 12 percent. The cumulative effect of this systemic overpayment impacts overall organizational performance and shareholder value.
The cascade impact provides financial incentive to drive preferential attachment. The more highly connected one is, the more likely one is to partake of any related overpayment.
The research also found that the perception of unfairness was key to turnover and confirms the common sense notion that employees at the lower levels have limits to the amount of inequality they will tolerate. This phenomenon will no doubt be further quantified in neuroeconomic studies.
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