New Research Finds When CFO is Hired After CEO, CEO Earnings Increase by About 10%

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New Research Finds When CFO is Hired After CEO, CEO Earnings Increase by About 10%

INFORMS Journal Management Science New Study Key Takeaways:

  • CEOs take home an average of 10% more earnings when working with a CFO who was hired after them.
  • Increased compensation is concentrated in the early years of the co-opted CFO’s tenure.
  • Some CFOs might be pressured to tweak earnings to boost the stock price.

 

CATONSVILLE, MD, August 27, 2020 – It’s no secret that company chief executive officers (CEOs) are getting hefty yearly salaries. CEO compensation has grown by 940% since 1978, compared to a mere 12% increase for employees during that same time frame. New research in the INFORMS journal Management Science finds CEO’s compensation climbs if they appoint a chief financial officer (CFO). 

The study, “CFO co-option and CEO compensation,” conducted by John Heater and Bill Mayew of Duke University, Shane Dikolli of the University of Virginia and Mani Sethuraman of Cornell University, looked at 20 years of data from S&P 1500 firms and found that CEOs took home an average of 10% more when working with a CFO who was hired after them. 

“The increased compensation is concentrated in the early years of the co-opted CFO’s tenure, or a board member hired after the CEO, and in components of compensation that vary with the achievement of analyst-based earnings targets,” said Heater, an assistant professor of business administration at Duke’s Fuqua School of Business. “The evidence suggests some finance chiefs might be pressured to tweak earnings to boost the stock price.”

The findings shed light on how the formation of the relationship between two of the top decision-makers in a firm shape payout to a firm’s CEO. The findings also further our understanding of how the intersection of financial reporting and performance evaluation processes impact corporate outcomes in general and executive compensation in particular.

“This work offers quantifiable insights into this phenomenon that thus far has been difficult to document,” continued Heater. “The findings provide further evidence of a link between power structure at the top levels of a corporation and financial reporting decisions, which can generate a CEO compensation premium.”

Previous research shows CEOs may apply influence up their chain of command on a co-opted board of directors; specifically, when newly appointed board members work with an incumbent CEO. The board’s oversight is weaker and CEO compensation is as much as 20% higher.

 

Link to full study.

 

About INFORMS and Management Science

Management Science is a premier peer-reviewed scholarly journal focused on research using quantitative approaches to study all aspects of management in companies and organizations. It is published by INFORMS, the leading international association for operations research and analytics professionals. More information is available at www.informs.org or @informs.

 

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Contact:

Ashley Smith

443-757-3578

asmith@informs.org