Study finds that too much greed and too much generosity can both hurt a company’s bottom line.
by Rachel Stowe Master
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More in Research + Discovery
Topics: Neeley School of Business,Research & Discovery
by Rachel Stowe Master
After the Great Recession, many investors pointed fingers at the millionaires in charge of multibillion-dollar corporations, but were the accusations of avarice on target?
Michael Hitt couldn’t find business research linking greed to the bottom line. Existing studies tended to intertwine greed with hubris. So he launched a study to determine if extravagant salaries of top executives hurt shareholder returns, undertaking a painstaking process to separate greed from arrogant behavior.
“Just because an executive is highly paid doesn’t mean that he or she is greedy,” said Hitt, distinguished research fellow in management, entrepreneurship and leadership. “We defined it [greed] as the pursuit of extraordinary wealth.”
A company’s composition influences salary structure, Hitt said. “We had to find a way to determine when an executive is more likely to have some influence on his or her compensation.”
Analyzing CEOs who led the wealthiest firms in the U.S. between 1997 and 2006, Hitt scrutinized data from more than 300 publicly traded companies, whose boards of directors determined executive compensation. He then tied the salaries to the firms’ performance over time to compare compensation with what would be considered standard based on the companies’ performance.
Hitt published his research results in the Journal of Management with co-authors Katalin Takacs Haynes at the University of Delaware and Joanna Tochman Campbell at the University of Cincinnati. The results showed that greed does have a negative relationship with shareholder returns, but companies can moderate the effect by reducing managerial discretion, lengthening tenures of top executives and creating stronger boards of directors with more members who are otherwise unaffiliated with the company.
About 70 percent of chief executives chair the board of directors for their company, said Hitt.
“You need people who are confident, who are motivated and who also balance that with altruism, but not to an extreme.” Michael Hitt, distinguished research fellow in management, entrepreneurship and leadership
“So if you’re chairman of the board, you also have input on who serves on the board, and you control the agenda to a degree and likely have more influence over subcommittees,” he said. “CEOs in those roles have more discretion to act. Where they had more discretion, we found the existence of more managerial greed.”
Another study contrasted selfish and selfless leaders and found that neither extreme was good for the firm. Greed can result in an emphasis on short-term performance, but Hitt said leaders who take altruism to the extreme can fail to satisfy shareholders, which might compromise a company’s viability.
Hitt, Haynes and Matthew Josefy at Indiana University published results of the greed-versus-altruism study in the Journal of Leadership & Organizational Studies. Now the researchers are collecting data on the attributes of high-performing and low-performing CEOs to identify factors contributing to or deterring their companies’ success.
“You need people who are confident, who are motivated and who also balance that with altruism, but not to an extreme,” Hitt said. “They want to help others, and they want to see others gain value along with them and their firms. Those are the ones who tend to be the best leaders for the firm, and those firms are likely to have the best long-term performance.”
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