Skip to main content
SpringerLink
Log in

Fat Cats and Thin Followers: Excessive CEO Pay May Reduce Ability to Lead

  • Chapter
  • First Online:
The Social Psychology of Inequality

Abstract

The large discrepancy between the pay of chief executive officers (CEOs) and their subordinates within organizations is attracting increasing attention and controversy. While there is evidence that this pay disparity may be contributing to rises in societal income inequality (and thus the range of associated social ills), there is little understanding of the impact of pay disparity on CEOs’ abilities to effectively lead their organizations. Drawing on the social identity approach to leadership, we argue that as the pay of CEOs increases relative to their followers, these followers will be less likely to identify with their CEOs as “one of us.” This, in turn, should undermine followers’ willingness to be influenced by the CEO: to follow their lead. We discuss two recent studies that provide the first test of these claims. These studies provide archival and experimental evidence that high CEO pay reduces followers’ identification as well as their perceptions that the CEO is a charismatic identity leader. In sum, then, this work suggests that high CEO pay may directly impair their capacity to perform their core function of leading their organization.

Fat Cat Thursday: Top bosses earn workers’ salary by lunchtime. (Neate, 2018)

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 139.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 179.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 179.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

References

  • Adams, J. S. (1963). Toward an understanding of inequity. Journal of Abnormal and Social Psychology, 67(5), 422–436.

    Article  Google Scholar 

  • Agrawal, A., Knoeber, C. R., & Tsoulouhas, T. (2006). Are outsiders handicapped in CEO successions? Journal of Corporate Finance, 12(3), 619–644.

    Article  Google Scholar 

  • Barreto, N. B., & Hogg, M. A. (2017). Evaluation of and support for group prototypical leaders: A meta-analysis of twenty years of empirical research. Social Influence, 12(1), 41–55.

    Article  Google Scholar 

  • Bebchuk, L. A. (1994). Efficient and inefficient sales of corporate control. The Quarterly Journal of Economics, 109(4), 957–993.

    Article  Google Scholar 

  • Bebchuk, L. A., & Fried, J. (2004). Pay without performance, the unfulfilled promise of executive compensation. Cambridge, MA: Harvard University Press.

    Google Scholar 

  • Bizjak, J., Lemmon, M., & Nguyen, T. (2011). Are all CEOs above average? An empirical analysis of compensation peer groups and pay design. Journal of Financial Economics, 100(3), 538–555.

    Article  Google Scholar 

  • Blader, S. L., & Tyler, T. R. (2009). Testing and extending the group engagement model: Linkages between social identity, procedural justice, economic outcomes, and extrarole behavior. Journal of Applied Psychology, 94(2), 445.

    Article  PubMed  Google Scholar 

  • Bloom, M. (1999). The performance effects of pay dispersion on individuals and organizations. Academy of Management Journal, 42(1), 25–40.

    Article  Google Scholar 

  • CIPD. (2018). Executive pay: 2018 review of FTSE 100 executive pay packages. Available from https://www.cipd.co.uk/knowledge/strategy/reward/executive-pay-ftse-100-2018

  • Coates, D., Frick, B., & Jewell, T. (2016). Superstar salaries and soccer success: The impact of designated players in major league soccer. Journal of Sports Economics, 17(7), 716–735.

    Article  Google Scholar 

  • Connelly, B. L., Tihanyi, L., Crook, T. R., & Gangloff, K. A. (2014). Tournament theory. Journal of Management, 40(1), 16–47.

    Article  Google Scholar 

  • Cullen, Z., & Perez-Truglia, R. (2018). How much does your boss make? The effects of salary comparisons (No. w24841). National Bureau of Economic Research.

    Google Scholar 

  • Cornelissen, T., Himmler, O., & Koenig, T. (2011). Perceived unfairness in CEO compensation and work morale. Economics Letters, 110(1), 45–48.

    Google Scholar 

  • Carpenter, M. A., & Sanders, W. G. (2002). Top management team compensation: The missing link between CEO pay and firm performance?. Strategic management journal, 23(4), 367–375.

    Google Scholar 

  • Deaux, K. (1996). Social identification. In E. T. Higgins & A. W. Kruglanski (Eds.), Social psychology: Handbook of basic principles (pp. 777–798). New York: Guilford.

    Google Scholar 

  • Edmans, A., Gabaix, X., & Landier, A. (2008). A multiplicative model of optimal CEO incentives in market equilibrium. The Review of Financial Studies, 22(12), 4881–4917.

    Article  Google Scholar 

  • Ellemers, N., De Gilder, D., & Haslam, S. A. (2004). Motivating individuals and groups at work: A social identity perspective on leadership and group performance. Academy of Management Review, 29(3), 459–478.

    Article  Google Scholar 

  • Falato, A., Milbourn, T., & Li, D. (2012). CEO pay and the market for CEOs. papers.ssrn.com, https://www.federalreserve.gov/pubs/feds/2012/201239/201239pap.pdf.

  • Faleye, O., Reis, E., & Venkateswaran, A. (2013). The determinants and effects of CEO–employee pay ratios. Journal of Banking & Finance, 37(8), 3258–3272.

    Article  Google Scholar 

  • Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law and Economics, 26(2), 301–325.

    Article  Google Scholar 

  • Finkelstein, S., Hambrick, D. C., & Cannella, A. A. (2009). Strategic leadership: Theory and research on executives, top management teams, and boards. New York: Oxford University Press.

    Google Scholar 

  • Frick, B., Priz, J., & Winkelmann, K. (2003). Pay inequalities and team performance: Empirical evidence from the North American major leagues. International Journal of Manpower, 24(4), 472–488.

    Article  Google Scholar 

  • Fredrickson, J. W., Davis-Blake, A., & Sanders, W. G. (2010). Sharing the wealth: Social comparisons and pay dispersion in the CEO’s top team. Strategic Management Journal, 31(10), 1031–1053.

    Google Scholar 

  • Gabaix, X., & Landier, A. (2008). Why has CEO pay increased so much? The Quarterly Journal of Economics, 123(1), 49–100.

    Article  Google Scholar 

  • Garen, J. E. (1994). Executive compensation and principal-agent theory. Journal of Political Economy, 102(6), 1175–1199.

    Article  Google Scholar 

  • Goodman, P. S. (1974). An examination of referents used in the evaluation of pay. Organizational Behavior and Human Performance, 12(2), 170–195.

    Article  Google Scholar 

  • Greenberg, J. (1990). Employee theft as a reaction to underpayment inequity: The hidden cost of pay cuts. Journal of Applied Psychology, 75(5), 561.

    Article  Google Scholar 

  • Gupta, A., & Wowak, A. J. (2017). The elephant (or donkey) in the boardroom: How board political ideology affects CEO pay. Administrative Science Quarterly, 62(1), 1–30.

    Article  Google Scholar 

  • Haslam, S. A. (2004). Leadership. In A. Kuper & J. Kuper (Eds.), The social science encyclopedia (3rd ed., pp. 566–568). New York: Routledge.

    Google Scholar 

  • Haslam, S. A., & Platow, M. J. (2001). The link between leadership and followership: How affirming social identity translates vision into action. Personality and Social Psychology Bulletin, 27(11), 1469–1479.

    Article  Google Scholar 

  • Haslam, S. A., Powell, C., & Turner, J. C. (2000). Social identity, self-categorization, and work motivation: Rethinking the contribution of the group to positive and sustainable organisational outcomes. Applied Psychology, 49(3), 319–339.

    Article  Google Scholar 

  • Haslam, S. A., Reicher, S. D., & Platow, M. J. (2011). The new psychology of leadership: Identity, influence and power. London: Psychology Press.

    Google Scholar 

  • Haß, L. H., Müller, M. A., & Vergauwe, S. (2015). Tournament incentives and corporate fraud. Journal of Corporate Finance, 34, 251–267.

    Article  Google Scholar 

  • Hogg, M. A., Van Knippenberg, D., & Rast III, D. E. (2012). Intergroup leadership in organizations: Leading across group and organizational boundaries. Academy of Management Review, 37(2), 232–255.

    Article  Google Scholar 

  • Hölmstrom, B. (1979). Moral hazard and observability. The Bell Journal of Economics, 10(1), 74–91.

    Article  Google Scholar 

  • Hayward, M. L., & Hambrick, D. C. (1997). Explaining the premiums paid for large acquisitions: Evidence of CEO hubris. Administrative science quarterly, 103–127.

    Google Scholar 

  • Hollander, E. P. (1995). Ethical challenges in the leader-follower relationship. Business Ethics Quarterly, 55–65.

    Google Scholar 

  • Jackson, J. W., & Smith, E. R. (1999). Conceptualizing social identity: A new framework and evidence for the impact of different dimensions. Personality and Social Psychology Bulletin, 25(1), 120–135.

    Article  Google Scholar 

  • Jetten, J., Wang, Z., Steffens, N. K., Mols, F., Peters, K., & Verkuyten, M. (2017). A social identity analysis of responses to economic inequality. Current Opinion in Psychology, 18, 1–5. https://doi.org/10.1016/j.copsyc.2017.05.011

    Article  PubMed  Google Scholar 

  • Kiatpongsan, S., & Norton, M. I. (2014). How much (more) should CEOs make? A universal desire for more equal pay. Perspectives on Psychological Science, 9(6), 587–593.

    Article  PubMed  Google Scholar 

  • Lee, E. S., Park, T. Y., & Koo, B. (2015). Identifying organizational identification as a basis for attitudes and behaviors: A meta-analytic review. Psychological Bulletin, 141(5), 1049.

    Article  PubMed  Google Scholar 

  • Levine, D. I. (1991). Cohesiveness, productivity, and wage dispersion. Journal of Economic Behavior & Organization, 15(2), 237–255.

    Article  Google Scholar 

  • McCall, L., & Percheski, C. (2010). Income inequality: New trends and research directions. Annual Review of Sociology, 36, 329–347.

    Article  Google Scholar 

  • Mishel, L., & Schneider, J. (2017). CEO pay remains high relative to the pay of typical workers and high-wage earners. Washington, DC: Economic Policy Institute.

    Google Scholar 

  • Murphy, K. J., & Sandino, T. (2010). Executive pay and “independent” compensation consultants. Journal of Accounting and Economics, 49(3), 247–262.

    Article  Google Scholar 

  • Neate, R. (2018). ‘Fat Cat Thursday’: Top bosses earn workers’ annual salary by lunchtime. The Guardian. 4 January. Accessed from https://www.theguardian.com/business/2018/jan/04/fat-cat-thursday-top-bossesearn-workers-annual-salary-by-lunchtime30August2019.

  • Ou, A. Y., Waldman, D. A., & Peterson, S. J. (2018). Do humble CEOs matter? An examination of CEO humility and firm outcomes. Journal of Management, 44(3), 1147–1173.

    Google Scholar 

  • Peters, K., & Haslam, S. A. (2018). I follow, therefore I lead: A longitudinal study of leader and follower identity and leadership in the marines. British Journal of Psychology, 109(4), 708–723.

    Article  PubMed  Google Scholar 

  • Pfeffer, J., & Langton, N. (1993). The effect of wage dispersion on satisfaction, productivity, and working collaboratively: Evidence from college and university faculty. Administrative Science Quarterly, 38(3), 382–407.

    Article  Google Scholar 

  • Piketty, T. (2014). Capital in the twenty-first century. Cambridge, MA: Harvard University Press.

    Book  Google Scholar 

  • Platow, M. J., & van Knippenberg, D. (2001). A social identity analysis of leadership endorsement: The effects of leader ingroup prototypicality and distributive intergroup fairness. Personality and Social Psychology Bulletin, 27(11), 1508–1519.

    Article  Google Scholar 

  • Park, Y. W., Nelson, T., & Huson, M. R. (2001). Executive pay and the disclosure environment: Canadian evidence. Journal of Financial Research, 24(3), 347–365.

    Google Scholar 

  • Rast, J. C. (2008). Leadership definition. In A. Marturano & J. Gosling (Eds.), Leadership: The key concepts (pp. 94–99). New York: Routledge.

    Google Scholar 

  • Rosen, S. (1986). Prizes and incentives in elimination tournaments. American Economic Review, 76, 701–715.

    Google Scholar 

  • Siegel, P. A., & Hambrick, D. C. (2005). Pay disparities within top management groups: Evidence of harmful effects on performance of high-technology firms. Organization Science, 16(3), 259–274.

    Article  Google Scholar 

  • Steffens, N. K., & Haslam, S. A. (2013). Power through ‘us’: Leaders’ use of we-referencing language predicts election victory. PloS one, 8(10), e77952.

    Article  PubMed  PubMed Central  Google Scholar 

  • Steffens, N. K., Haslam, S. A., Peters, K., & Quiggin, J. (2018). Identity economics meets identity leadership: Exploring the consequences of elevated CEO pay. The Leadership Quarterly.https://doi.org/10.1016/j.leaqua.2018.10.001

  • Steffens, N. K., Haslam, S. A., Reicher, S. D., Platow, M. J., Fransen, K., Yang, J., et al. (2014). Leadership as social identity management: Introducing the Identity Leadership Inventory (ILI) to assess and validate a four-dimensional model. The Leadership Quarterly, 25(5), 1001–1024.

    Article  Google Scholar 

  • Tajfel, H., & Turner, J. C. (1979). An integrative theory of intergroup conflict. In W. G. Austin & S. Worchel (Eds.), The social psychology of intergroup relations (pp. 33–37). Monterey, CA: Thomson Brooks/Cole Publishing Co..

    Google Scholar 

  • Turner, J. C. (1982). Towards a cognitive redefinition of the social group. In H. Tajfel (Ed.), Social identity and intergroup relations (pp. 15–40). Cambridge, UK: Cambridge University Press.

    Google Scholar 

  • Turner, J. C. (1991). Social influence. Milton Keynes, UK: Open University Press.

    Google Scholar 

  • Turner, J. C., & Haslam, S. A. (2001). Social identity, organizations, and leadership. In M. E. Turner (Ed.), Groups at work: Theory and research (pp. 25–65). Mahwah, NJ: Lawrence Erlbaum Associates Publishers.

    Google Scholar 

  • Turner, J. C., Oakes, P. J., Haslam, S. A., & McGarty, C. (1994). Self and collective: Cognition and social context. Personality and Social Psychology Bulletin, 20(5), 454–463.

    Article  Google Scholar 

  • Ullrich, J., Christ, O., & van Dick, R. (2009). Substitutes for procedural fairness: Prototypical leaders are endorsed whether they are fair or not. Journal of Applied Psychology, 94(1), 235–244.

    Article  PubMed  Google Scholar 

  • van Dick, R., Grojean, M. W., Christ, O., & Wieseke, J. (2006). Identity and the extra mile: Relationships between organizational identification and organizational citizenship behaviour. British Journal of Management, 17(4), 283–301.

    Article  Google Scholar 

  • van Knippenberg, D., & Hogg, M. A. (2003). A social identity model of leadership effectiveness in organizations. Research in Organizational Behavior, 25, 243–295.

    Article  Google Scholar 

  • van Veen, K., & Wittek, R. (2016). Relational signalling and the rise of CEO compensation: “… it is not just about money, it is about what the money says…”. Long Range Planning, 49(4), 477–490.

    Article  Google Scholar 

  • Van Knippenberg, D. (2011). Embodying who we are: Leader group prototypicality and leadership effectiveness. The Leadership Quarterly, 22(6), 1078–1091.

    Article  Google Scholar 

  • Walker, J. (2016). Australia should compare CEO and average worker pay like the US and UK. The Conversation. Available from https://theconversation.com/australia-should-compare-ceo-and-average-worker-pay-like-the-us-and-uk-65898

  • Wallace, M. J., & Fay, C. H. (1988). Compensation theory and practice. Boston: Pws-Kent Publishing Company.

    Google Scholar 

  • Wade, J. B., O’Reilly III, C. A., & Pollock, T. G. (2006). Overpaid CEOs and underpaid managers: Fairness and executive compensation. Organization Science, 17(5), 527–544.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Queensland, Brisbane, QLD, Australia

    Kim Peters, Miguel A. Fonseca, S. Alexander Haslam, Niklas K. Steffens & John Quiggin

Authors
  1. Kim Peters
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Miguel A. Fonseca
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. S. Alexander Haslam
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Niklas K. Steffens
    View author publications

    You can also search for this author in PubMed Google Scholar

  5. John Quiggin
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Kim Peters .

Editor information

Editors and Affiliations

  1. School of Psychology, University of Queensland, St. Lucia, QLD, Australia

    Jolanda Jetten  & Kim Peters  & 

Rights and permissions

Reprints and permissions

Copyright information

© 2019 Springer Nature Switzerland AG

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Peters, K., Fonseca, M.A., Haslam, S.A., Steffens, N.K., Quiggin, J. (2019). Fat Cats and Thin Followers: Excessive CEO Pay May Reduce Ability to Lead. In: Jetten, J., Peters, K. (eds) The Social Psychology of Inequality. Springer, Cham. https://doi.org/10.1007/978-3-030-28856-3_2

Download citation

Publish with us

Policies and ethics

Search

Navigation