CEOs and top executives have major influence over the culture in their organizations. They can set the tone for the entire organization by, for example, how they punish incidents of wrongdoing in the firm, and how they set pay schemes for lower-level employees. However, interviews with top executives in banks exposed divergent views about how much the buck stopped with them in terms of preventing wrongdoing. In interviews, some top executives in banks took personal responsibility for preventing wrongdoing. Others literally shrugged their shoulders when asked what they can do to make their organization behave more ethically. It is not surprising that there were such divergent outcomes in terms of wrongdoing when top managers’ attitudes on personal responsibility also differed so much.
Punish bad behavior, even at the top
Previous research shows that the incidence of wrongdoing declines significantly when the probability of detecting it and the severity of punishment is high. Potential wrongdoers are more likely to be deterred if they know they face negative consequences if caught. This sounds like common sense. However, some companies have different rules for executives than for the rest of the firm. This double standard is always noticed, and it can fuel resentment and make it more likely that lower-ranked employees will justify their own inappropriate behavior.
Redesign pay schemes
When boards of directors are designing pay packages for CEOs, they need to consider the effect on other stakeholders, such as employees. Elevated levels of option pay can incentivize risky behavior and divert attention away from risk management, providing greater opportunities for others to commit wrongdoing. Moreover, while big pay packages for the CEO and other top executives can act as a carrot to motivate people to work hard and climb the corporate ladder, they can also induce feelings of envy and resentment. This can make employees slack off, have lower job satisfaction, cooperate less with colleagues, and even quit their jobs more frequently. At the more extreme end of the scale, feelings of inequity and injustice with respect to pay can lead to wrongful acts, such as theft. As a result, boards of directors should be wary about implementing aggressive CEO compensation schemes if there is already a high pay gap within the company.
Make the disclosure of pay data mandatory
The study, along with previous research, found pay can be a key driver of behavior in firms. This information can help regulators predict wrongdoing in banks and can also be useful for investors considering where to put their money. For this reason, regulators should consider making public disclosure of pay data mandatory for all banks.
This article is based on Predicting employee pay wrongdoing: The complementary effect of CEO option pay and the pay gap by Stephen J. Smulowitz and Juan Almandoz. The research was first published in Organizational Behavior and Human Decision Processes 162 2021 p. 123–135.