DU Researcher Finds Link Between CEO Pay and Consumer Trust
Corporate governance is playing an increasingly important role in consumers’ attitudes towards the companies that they buy from. According to new research published in the Journal of Business Ethics, this includes a growing focus on how much CEOs are paid.
By conducting and analyzing the results of three studies, Ali Besharat, associate professor of marketing in the Daniels College of Business and co-director of the Consumer Insights and Business Innovation Center, discovered that consumer trust and, importantly, their intentions to spend, are influenced by their knowledge of a CEO’s compensation—particularly for brands that consumers hold in high regard.
In an interview with the DU Newsroom, Besharat explains the ethical implications of high CEO pay, how it impacts consumers’ perceptions and behaviors and how companies can utilize corporate governance decisions to build trust and strengthen their brand. This conversation has been edited for clarity.
Why is a CEO’s salary an ethical issue?
In recent years, there has been a sharp increase in the wage disparity between CEOs and regular employees. Greater transparency in CEO pay gap is being driven by enhanced regulatory requirements (e.g., reporting of pay in proxy statements), increased 24/7 access to business-related news (e.g., CNBC) and increased consumer access to information via the internet. Consumers have not only increased access to information, but also greater exposure to myriad messages regarding CEO salaries. Given that the pay gap has sparked employee protests, demonstrations and calls for higher minimum wages, this is an ethical problem. It also calls into question whether CEOs are worth as much money as they are paid, as well as issues of fairness and inequality.
As the difference between CEO pay and the pay of their employees has been growing exponentially over the past few years, CEO salaries have come to light. For instance, in 1965, the average CEO salary in the United States was nearly 20 times more than the average worker's salary. Today, though, this number has increased to over 350 times. High CEO salaries can be costly to the business. Exorbitant CEO salaries deprive businesses of funds that could be used for internal investments, employee raises or community outreach. Further, the method used to decide CEO compensation is likewise fraught with ethical issues. CEOs occasionally receive hefty incentives even when their businesses perform poorly.
According to your research, how do consumers perceive high CEO pay?
Just as knowledge of CEO pay can impact investors, such information regarding CEOs should also influence consumers. CEO pay offers an opportunity for consumers to assess whether they can trust that a company is operating in the best interests of consumers as it represents a highly visible choice of how firm leaders choose to use valuable resources. Our research demonstrates that CEO remuneration has a negative impact on consumer purchasing decisions through lowering brand trust in the company. Our findings show that a corporate governance choice—such as CEO pay—has an influence on the brand and the company. Simply put, our research reveals that CEO pay, as the most visible and extensively disclosed part of corporate governance, affects consumer trust in a company's brand, which ultimately affects consumer buying behavior.
When does CEO pay have the greatest impact on consumers’ perceptions of a brand and their purchase intent?
Our research indicates that the negative relationship between CEO salary and consumers’ purchase behavior will be amplified when a CEO leads a firm during a brand crisis—when company actions violate normative rules that consumers expect of firms. Brand crises weaken consumer perception of a brand’s ability to deliver on expectations, therefore jeopardizing the brand’s reputation. It is because there is incongruence between the CEO’s leadership of the firm (which is poor) and the amount of reward he/she receives (which is high). Interestingly, the combination effect of high CEO pay and brand crisis on purchasing behavior is worse when the company has strong brand equity, suggesting that rather than being protected by the value of the brand itself, consumers are more let down by signs of poor management (compared to weak-equity brands).
What role does corporate governance and decision-making play in building or eroding consumer trust?
Managerial research suggests that today’s consumers care about the behavior of firms and their leaders. Consumers believe that the CEO’s most important job is “to build trust,” ranking this attribute higher than any of the following three attributes: “producing high quality products and services,” “[producing] business decisions [that] reflect company values,” or “increasing profits and stock price.” A CEO receiving high pay at the same time his/her firm experiences a brand crisis (i.e., poor performance) amplifies the message that the firm is behaving in a CEO-serving, rather than consumer-serving, manner, reducing consumer trust and decreasing consumers’ propensity to buy from the firm.
For consumers to trust a brand, they must have confidence that the firm is benevolent and not purely egocentrically profit motivated. In line with this expectation, the International Corporate Governance Network (ICGN), a large investor-led governance organization, published a note in April 2020 about CEO compensation in a COVID-19 world. The note suggested that maintaining or increasing executive pay during the COVID-19 global pandemic—a time when companies are forced to lay off employees to cut costs—could threaten consumers’ trust in the company.
At a practical level, regardless of the brand and industry nature, our findings suggest that firm leaders could proactively use CEO pay knowledge in a competitive context by highlighting their company’s advantages (modest CEO pay) or a competitor’s weakness (high CEO pay under conditions of brand crisis). As an example, Delta’s CEO, Gerald Grinstein, declined his six-figure salary amid a company bankruptcy, which was garnering significant public attention; the headline in one newspaper read “Delta CEO Forgoes Salary…” Our findings, which imply that board actions to limit CEO pay may have consumer benefits that warrant sharing, might assist an executive communications team in understanding how and when they should get involved in messaging related to CEO pay, as the Delta CEO example shows.
What is the biggest takeaway from this research?
Using a multi-method design incorporating a pilot study, two online experiments and an event study, this research offers boards and CEOs crucial managerial insight. The discussion of CEO salary is pertinent at this time since there have been some questions regarding the effectiveness of current corporate governance mechanisms in policing and limiting excessive CEO pay. There is increased attention about CEO pay, with an increase in the number of lawsuits contesting executive remuneration, because of intense media scrutiny of CEO pay and the SEC's pay ratio disclosure order that took effect in 2018. Due to increased public access to information on CEO compensation, businesses that ignore the connection between CEO compensation, customer behavior and brand trust run the danger of alienating their target market. This is especially true when the brand is going through a crisis. As a result, this research offers advice to boards of directors on how to handle CEO compensation during a brand crisis and how to interact with customers to win back their trust.