Jay Mathews
Social scientists have spent decades trying to discover why some corporate chief executive officers (CEOs) make more money than others. Three university researchers say they now have a surprising answer: snob appeal.
Their complex analysis of the records of 61 Fortune 500 companies, controlling the data for company size, CEO tenure and education and other factors, shows that if the CEO has higher social status than the chair of the board’s compensation committee, he is likely to make 20% more than a CEO with less status than his compensation committee chair.
The research by scholars at Duke University, Stanford University and the University of Illinois is the latest of a number of studies attempting to solve the mysteries of corporate life through examination of something called “social capital” – the power of social status unrelated to grit and energy and size of pay cheque.
It is an old-fashioned notion in some ways. United States business executives act and speak as if no one cares where they play golf or where they went to school, just how much they add to revenue. But the scholars examining the data say that some indicators of what used to be called “good breeding” still have influence.
Executive compensation experts caution that the new CEO study includes relatively few companies and assumes, among other things, that high status is conferred by attending one of only 11 colleges, but they concede that snobbery is still a lively presence in US boardrooms and may have an impact.
“Social capital is incredibly important in the corporate world,” said Maura Belliveau, a professor at Duke’s Fuqua School of Business and is a co-author of the study in the December/January issue of the Academy of Management Journal.
Other social capital studies have found several instances in which executives get their way for no apparent reason other than their high status, with lesser status executives showing the same deference of young roosters making way for the cock-of- the-walk. One study reported that when managers of a company targeted for a takeover had lower status than outside directors of the firm trying to swallow them, they were more likely to co-operate in their surrender.
In the CEO study, Belliveau, Charles Reilly III of Stanford and James Wade of Illinois, analysed 1985 data on CEO base salaries. They assessed the status of CEOs and their compensation committee chair based on how many boards and clubs they belonged to and where they went to college. Belliveau said that although the salary data is 12 years old and does not include stock options, she thinks the differences in compensation and their ties to social status still hold up.
As part of the study, they assigned two status points to those who attended Princeton, Yale or Harvard, one status point to those who went to Columbia, Cornell, Dartmouth, Johns Hopkins, MIT, Pennsylvania, Stanford or Williams, and zero points for any other school.
The study borrowed the college ratings from work done by researchers Michael Useem and Jerome Karabel. Karabel, a University of California at Berkeley sociologist, said their list was based on a study of schools favoured by upper-class Americans in 1940, and reflects the social status, not academic status, of the schools involved, particularly in the minds of older Americans.
Graef Crystal, a San Diego-based compensation expert with two degrees from Berkeley, said the CEO study suffered from having older data and relatively few companies, but that social status did have power. While seeking success in the financial world of New York, he said, “it took me years to compensate for the fact that I came from the wrong part of the country and compounded my mistake by going to the wrong school”.
The CEO researchers said they were surprised to find there was little or no advantage to the CEO whose status was similar to that of his compensation committee chair.
Their findings, they said, could be useful to stockholders. The appointment of higher status compensation committee chairs, who “are better equipped to resist CEO influence and curb CEO influence attempts” may be “a good way to foster accountability”.