Electronic copy available at: http://ssrn.com/abstract=1612486
Running head: WHEN EXECUTIVES RAKE IN MILLIONS
WHEN EXECUTIVES RAKE IN MILLIONS: THE CALLOUS TREATMENT OF
LOWER LEVEL EMPLOYEES
Sreedhari D. Desai
Edmond J. Safra Center for Ethics
Women & Public Policy Program
Harvard Kennedy School of Government
Kenan-Flagler Business School
University of North Carolina at Chapel Hill
Graduate School of Management
University of California, Davis
Jennifer M. George
Jesse H. Jones Graduate School of Business and
Department of Psychology
Arthur P. Brief
David Eccles School of Business
University of Utah
July 21, 2011
The authors gratefully acknowledge comments and helpful suggestions from Max H. Bazerman,
Collin Fisher, Christopher Oveis, and Lakshmi Ramarajan. This research was supported by the
Program on Negotiation Fellowship at the Harvard Law School and the Edmond J. Safra
Fellowship at Harvard University. Please address correspondence concerning this article to
Electronic copy available at: http://ssrn.com/abstract=1612486
When executives rake in millions 2
The topic of top manager compensation has received tremendous attention over the years
from both the research community and the popular media. In this paper, we examine a
heretofore ignored consequence of rising top manager compensation. Specifically, we
argue that when top managers receive high levels of compensation, they tend to treat
lower level employees callously. Further, we present findings from two studies that
support this contention. In an archival study of large public US corporations, we show
that firms that award their top managers high levels of compensation employ less
benevolent and harsher employee relations practices. In a laboratory experiment we
show that subjects assigned to the managerial role and who receive high levels of
compensation are more likely to fire their subordinates than those who receive low levels
of compensation. We discuss the implications of our findings for organizations and offer
some tentative remedies to address the broader issue of excessive executive
Electronic copy available at: http://ssrn.com/abstract=1612486
When executives rake in millions 3
WHEN EXECUTIVES RAKE IN MILLIONS: THE CALLOUS TREATMENT OF
LOWER LEVEL EMPLOYEES
This paper explores the relationship between two phenomenon of great concern to
management researchers and popular commentators. Over the last several decades, the
compensation of top managers has skyrocketed. Representative of this dramatic increase,
the average compensation for Fortune 500 CEOs grew by 300 percent between 1990 and
2005, with the average CEO now earning $10.9 million a year (Dovrak, 2007; Frank,
2007). During the same period, the number of ethical transgressions against employees
has also grown considerably (National Business Ethics Survey, 2007). Of particular
concern, the treatment of rank and file employees has become increasingly callous
(Greenhouse, 2008). We maintain that the two phenomena are causally related. Simply
put, we argue that when top managers receive high levels of compensation, they tend to
treat lower level employees callously.
The remainder of the paper unfolds as follows. First, we conceptualize the
callous treatment of lower level employees. Next, we offer theory that suggests why top
managers who receive high levels of compensation tend to treat lower level employees
callously. Then we describe two studies that test this argument. In the first study, we
analyze archival data and find that firms employ less benevolent and hasher employee
relations practices when they bestow high levels of compensation on their CEOs. In the
second study, we find that subjects assigned to the role of a manager in a laboratory
experiment are more prone to fire employees exhibiting average performance when
When executives rake in millions 4
managers receive high levels of compensation. We conclude by discussing the
implications of our work for theory and practice.
CONCEPTUALIZATION OF CALLOUS TREATMENT
Our definition of callous treatment of employees builds on Hannon and Baron’s
conceptualization of alternative bases of employee attachment to the firm (Baron, Burton,
& Hannan 1996; Baron, Hannan, & Burton 2001; Hannan, Baron, Hsu, & Kocak 2006).
Hannan and associates offer a characterization of the employment blueprints employed
by Silicon Valley start-ups that they contend captures variation in employment relations
used by firms more generally. They conceptualize employment blueprints along three
dimensions; the criteria used in selecting employees, the devices used to control
employees, and the basis of employee attachment to the firm. Furthermore, they suggest
that the employee attachment dimension can be segmented into three categories labeled
“love,” “work,” and “money.”
At one extreme, some leaders seek to instill feelings of deep affection in workers,
which serve as the basis of their attachment to the firm. At the other extreme, some
leaders seek only to provide workers with sufficient monetary rewards to secure their
continued attachment to the firm. Occupying an intermediate position in the continuum,
some leaders seek to provide employees with sufficiently interesting work assignments
and valuable opportunities for skill enhancement and career advancement to obtain their
allegiance to the firm. Employment practices geared towards instilling feelings of
affection and providing opportunities for development are crucial elements of what some
have called “high commitment” labor relations practices (e.g., Arthur, 1994; Baron &
Kreps, 1999; Becker & Gerhart, 1996; Huselid, 1995; Walton, 1985).
When executives rake in millions 5
We define callous treatment of employees in terms of the presence of practices
that push the envelope of Hannan and colleagues’ “money” category; namely, practices
that encourage viewing employment relationship in strictly economic terms and, more
precisely, that seek to maximize the value added of labor while minimizing its cost, to the
point of violating employment contract provisions and labor law. Such practices include
low compensation, poor health and retirement benefits, mandatory overtime and
inflexible work scheduling, unsafe working conditions, strategic downsizing and
summary dismissal. Our definition of callous treatment also includes the absence of
practices that fall into Hannan and associates’ “love” and “work” categories. Such
practices include ample health and pension benefits, safe workplace initiatives, profit-
sharing programs, and opportunities for worker participation in management. Greenhouse
(2008) provides evidence of the callous treatment of lower level employees in the U.S. as
well as compelling descriptions of callous treatment at specific companies such as
Walmart and FedEx.
THE RELATIONSHIP BETWEEN MANAGERIAL COMPENSATION AND
We contend that high top manager compensation leads to the callous treatment of
lower level employees. The top managers of large firms, which are the focus of this
paper, are typically separated from lower level employees by many hierarchical levels.
But they are the ones who usually establish the broad parameters and many of the
specific policies that determine the treatment of lower level employees. Below, we
present three reasons why top managers who receive high levels of compensation are
likely to foster employee relations that can be characterized as callous.
When executives rake in millions 6
First, high compensation levels may activate the economic dimension of a top
manager’s self concept, causing him or her to view lower level employees in narrow
economic terms. Past experiments have demonstrated how arousing an economic self
concept can cause people to behave callously toward others. For instance, studies have
shown that subjects who are primed to view decisions through an economic lens via
exposure to business-related objects are more likely to behave selfishly (Reynolds,
Leavitt, & DeCelles, 2010; Kay, Wheeler, Bargh, & Ross 2004). Experiments also
indicate that subjects primed with the idea of “money” offer less help to others, create
more physical distance between themselves and others, and behave unethically
(Kouchaki, Smith-Crowe, Sousa, & Brief, 2011; Vohs, Mead, & Goode 2006). Archival
evidence and experiments show that people who are paid by the hour or who are made
aware of their hourly wage are less inclined to engage in volunteer activities (DeVoe &
Pfeffer 2007, 2010). Wheeler, DeMarree, and Petty (2005, 2007) believe that priming
subjects with ideas of money induce changes in subjects’ active self concept, making
concepts related to economics a more salient component of their self concept. Pfeffer
and DeVoe (2009) provide experimental evidence that hourly pay or awareness of one’s
hourly wage activates the economic dimension of a person’s self-concept. This idea is
consistent with Calder and Staw’s theory of the self-perception of motivation (1975),
which holds that people who receive overly sufficient justification for completing a task
come to think of their motivation for completing the task in strictly extrinsic terms.
We think that high amounts of top manager compensation may have effects
similar to those produced by business-related objects, money-related ideas, and hourly
pay described above. High compensation levels may amplify the already activated
When executives rake in millions 7
economic aspect of top managers’ self-concept, causing them to think of their
relationship to low level employees in primarily short run economic terms. And this may
cause top managers to provide employees with fewer opportunities and benefits that
foster their comprehensive long-term welfare. Further, it may lead top managers to treat
their employees in ways that maximize their short-term value to the firm; increasing the
work demands placed on employees, reducing the wages and benefits paid to them, all at
the expense of employee health and safety.
Second, high compensation levels may alter top managers’ cognitive and
motivational structures in ways that make them prone to treat lower level employees with
disregard and to be insensitive to the disapproval of those they treat callously. Classic
sociological thinkers such as Cooley (1902) as well as modern symbolic interactionists
such as Blumer (1969) maintain that a person’s identity is rooted in others’ perceptions of
their character. When top managers are awarded large compensation packages, they may
come to see themselves as particularly valuable to their firm and thus entitled to
exemption from normal moral constraints. Further, to the extent that attributions of
contribution and exemptions from moral constraints are zero-sum games, high
compensation levels may lead top managers to view lower level employees as less
valuable to the firm and less worthy of ethical treatment.
In addition, some researchers have suggested that money has symbolic meaning
that shapes the outlooks and behavior of those who possess it (Baker & Jimerson, 1992;
Doyle, 1992; Lea & Webley, 2006; Maurer, 2006; Mitchell & Mickel, 1999; Parry &
Bloch, 1989). Most germane, money can symbolize status within society and reduce the
need for social acceptance and belongingness. For example, Zhou, Vohs, and Baumeister
When executives rake in millions 8
(2009) demonstrated that thoughts of having money can mute reactions to threats of
social disapproval or even exclusion and physical pain. They argue that this is because
people view money as a resource that can be used to manipulate social systems. What is
more, some researchers have argued that money may have an addictive property such as
drugs and sex may have. When this is the case, money becomes an end in itself, to be
acquired even at the risk of harming others (e.g., Lea & Webley, 2006).
Third, high levels of compensation may be associated with the possession of
power, which in turn alters top managers’ cognitive and motivational structures in ways
that make them less inclined to treat others with compassion and more insensitive to the
reactions of those they treat callously. A substantial body of research shows that CEOs
who receive high levels of compensation tend to possess more power (Ackerman,
Goodwin, Dougherty, & Gallagher, 2000; Bebchuk & Fried, 2003). Economists view
compensation as a signal of a person’s position in an organization’s formal hierarchy
(Simon, 1957). They also contend that corporate boards award top managers high
salaries to signal their power to external constituencies (Steers & Ungson, 1987; Uson &
Steers, 1984; but see Miller & Wiseman, 2001; Henderson & Frederickson, 1996).
Finally, there is substantial research that shows that executive power and salaries are
highly correlated (Whistler, Meyer, Baum, & Sorensen, 1967; Finkelstein, 1992;
Hambrick & D’Aveni, 1992). This suggests that when CEOs receive high compensation
levels, they also possess great power and, importantly, perceive themselves to be
powerful. And the possession and self-perception of power may cause top managers to
treat their employees callously.
When executives rake in millions 9
A large body of experimental evidence demonstrates that the possession of power
alters peoples’ cognitive structures in ways that make them less inclined to treat others
with compassion and more inclined to treat them harshly. The possession of power
truncates peoples’ awareness of those over whom they exercise power, causing them to
view others as mere means to ends (Bartky, 1990; Frederickson & Roberts, 1997;
Nussbaum, 1999) and leading them to ignore others’ needs, aspirations, and emotions
(Anderson, Keltner, & John 2000; Galinsky, Mageee, Inesi, & Gruenfeld, 2006; Van
Kleef, De Dreu, Pietroni, & Mansead, 2006; but see Mast, Joans, & Hall, 2009). The
possession of power also biases people’s perception of others, causing them to see others
as less responsible for their own behavior, less human, and thus less entitled to ethical
and social normative consideration (Bandura, 1999; Bandura, Barbaranelli, Caprara, &
Pastorelli, 1996; Kelman, 1973; but see Lammers & Stapel, 2009). In addition, the
possession of power causes people to believe that they are superior to those who lack
power and that a psychological boundary separates them (Kipnis, 1972). The literature on
moral exclusion suggests that such categorization may cause people to think that those
with low or no power are beyond the “scope of justice,” i.e., that they comprise a group
that is undeserving of fair and moral considerations that apply to in-group members
(Deutsch, 1985, 2006; Opotow 1990, 1995; Opotow & Weiss, 2000; Staub, 1985). As a
result, people who possess power are more inclined to treat others in ways that violate
their basic human rights and conventional norms of justice (Haney, Banks, & Zimbardo,
1973; Zimbardo, 2007). Finally, the possession of power leads people to become less
sensitive to social disapproval (Keltner, Gruenfeld, & Anderson, 2003; Keltner, Young,
Heerey, Oemig, & Monarch, 1998).
When executives rake in millions 10
STUDY 1: ARCHIVAL DATA
We argue above that as a firm’s top manager compensation grows, the treatment
of its lower level employees becomes increasingly callous. In Study 1, we explore the
relationship between the compensation of a firm’s CEO and the treatment of its lower
level employees. We focus on CEO compensation for theoretical, empirical, and
practical reasons. First, a firm’s CEO is the most influential member of a firm’s top
management team (Bebchuk & Fried, 2003). Second, we strongly suspect that CEO
compensation is highly correlated with top manager compensation more generally. Third,
by focusing on a single member of a firm’s top management team, we simplify the task
of controlling for the possible impact of other top manager attributes. Thus, we test the
Hypothesis 1: CEO compensation is positively related to how callously an
organization treats rank-and-file workers.
Sample and dependent variable
The sample of organizations was drawn from Kinder, Lydenberg, Domini and Co.
(KLD1) Company Profiles, a database that has been used by numerous researchers to
study corporate social performance (e.g., Graves & Waddock, 1994; Johnson &
Greening, 1994; Kane, Velury, & Ruf, 2005; Turban & Greening, 1996) and was being
used by approximately 150 investment firms at the time of the study to evaluate
stakeholder performance for social choice funds. For the year 2007, KLD evaluated
approximately 650 firms on key stakeholder issues through publicly available
1 Now a part of RiskMetrics.
When executives rake in millions 11
information and interviews with key personnel. The KLD database offers many
advantages to researchers of corporate social performance, the most important of which
from the standpoint of this study is its inclusion of multiple objective indicators of
underlying corporate social performance constructs such as employee relations that are
applied consistently across companies (Graves & Waddock, 1994; Ruf et al., 1998; but
see Mattingly & Berman, 2006). We used the KLD data file for 2007, the year for which
the most recent data on organizations’ employee relations was available.2 In our sample,
we included only those firms that were listed in the KLD data set, and for whom
secondary data regarding executive compensation, firm details, and CEO gender were
available in the Compustat database. Our final sample size was 261 firms.
We conceptualized callous treatment of lower level employees as the presence of
harsh treatment and the absence of benevolent treatment of rank and file workers. Thus
we measured callous treatment using KLD indicators that tap the harshness and
benevolence of a firm’s relationship with its employees. Specifically, we operationalized
callousness by standardizing the sum of six KLD items that tap the harshness of a firm’s
relationship with its employees and the sum of five KLD items that tap the benevolence
of this relationship and then subtracted the standardized sum of the benevolence items
from the standardized sum of the harshness items (Kane, Velury, & Ruf, 2005). The KLD
indicators used to tap the harshness of a firm’s employee relations practices were: (i) the
company has a history of notably poor union relations; (ii) the company recently has
either paid substantial fines or civil penalties for willful violations of employee health
and safety standards, or has been otherwise involved in major health and safety
2 The firms included in the KLD data archive in 2007 are those listed on S&P Index, the Domini 400 Social
Index, the Russell 1000, and the Russell 3000 for this year.
When executives rake in millions 12
controversies; (iii) the company has made significant reductions in its workforce in recent
years; (iv) the company has either a substantially under-funded defined benefit pension
plan, or an inadequate retirement benefits program; and (v) the company is involved in an
employee relations controversy that is not covered by other KLD ratings. The KLD
indicators used to tap the benevolence of a firm’s employee relations practices were: (i)
the company has taken exceptional steps to treat its unionized workforce fairly; (ii) the
company has a cash profit-sharing program through which it has recently made
distributions to a majority of its workforce; (iii) the company strongly encourages worker
involvement and/or ownership through stock options available to a majority of its
employees; gain sharing, stock ownership, sharing of financial information, or
participation in management decision-making; (iv) the company has a notably strong
retirement benefits program; (v) the company has strong health and safety programs; and
(vi) the company has strong employee relations initiatives not covered by other KLD
We measured CEO compensation by the absolute value of CEO salary plus
bonus. We focused on the absolute value of CEO compensation for two reasons. First,
while most theory either implicitly assumes or explicitly maintains that people evaluate
their compensation relative to some benchmark (e.g., lower level employees, structurally
equivalent managers, or themselves in previous time periods), theorists vary with respect
to the implied or specified benchmark. By focusing on the absolute level of CEO
compensation, we hope to capture each of these relative levels of compensation with
which absolute compensation is likely highly correlated. This increases the chances of
When executives rake in millions 13
observing a compensation effect, albeit at the expense of greater theoretical and empirical
precisions. Second, while most who explicitly specify a benchmark focus on
compensation relative to subordinate others, we can not use this benchmark in our study.
The compensation of CEOs relative to the compensation of lower level employees is
likely confounded with our measure of callous treatment of lower level employees. We
measured CEO compensation as salary plus bonus because most previous studies on
executive pay have operationalized CEO compensation in this way (Tosi, Werner, Katz,
& Gomez-Meija, 2000).
To minimize the possibility that any observed relationship between CEO
compensation and the treatment of lower level employees is spurious, we controlled a
number of CEO, firm, and industry-level variables in our analyses. We controlled for
CEO gender because many, albeit not all, studies show that women tend to be more
ethical than men (Tensbrunsel & Smith-Crowe, 2008; but see Batson, Thompson,
Seuferling, Whitney, & Strongman, 1999; and Batson, Thompson, & Chen, 2002). CEO
gender was operationalized by a dichotomous variable coded 0 if the CEO was male and
coded 1 if the CEO was female.
We controlled for firm size because past theory has specified and research has
shown scale to be related to multiple dimensions of organizational structure and behavior.
More specifically, we know that large firms tend to be more hierarchical, although the
relationship between size and bureaucratization varies depending on a variety of factors
(Kimberly, 1976). Thus, we suspect that the CEOs of hierarchical firms will be more
socially distant from lower level employees. And numerous studies indicate that social
When executives rake in millions 14
distance is related to insensitivity to the ethical integrity of others and the propensity to
harm others (c.f., Milgram, 1977). We operationalized size as the log of total market
value of equity, lagged one year (Kane et al., 2005; Ricks, 1986).
We controlled for firm age because past theory and research suggests it is related
to multiple dimensions of organizational structure and behavior. More specifically, a
firm’s age is indicative of the historical period in which it was founded. Firms tend to
adopt structures and practices when founded that are prevalent and thus considered
legitimate at the time (Stinchcombe, 1969). And they tend to retain their initial structures
and practices over time due to structural inertia (Hannan & Freeman, 1985). Thus, older
firms are more likely to employ “older” employment relations blueprints (Mosakowski,
1993), which we suspect are more consistent with the callous treatment of lower level
employees. We operationalized firm age as the number of years since incorporation.
We controlled for firm performance because past theory and research suggests
that high performing firms have more resources to invest in practices that have long-run
cost-saving or profit potential, such as benevolent employee relations practices (Edmans,
2007). It also suggests that poorly performing firms are more likely to engage in forms
of misconduct, such as unethical and unfair labor practices, as a way to compensate for
resource shortfalls. We operationalized firm performance in two ways: by a market-
based measure, a proxy for Tobin’s Q, and by an accounting measure, return on assets
(ROA). Both of these variables are widely used in the finance literature as measures of a
firm’s financial performance (see, for e.g., Aggarwal & Samwick, 1999). Our proxy for
Tobin’s Q was the ratio of the firm’s market assets to its book value. ROA was
When executives rake in millions 15
computed as the ratio of net income before extraordinary items and discontinued
operations to the book value of assets.
We controlled for firm risk because prior research has shown that risk is
associated with employee relations. Specifically low risk firms exhibit better employee
relations and increased social responsibility (Bauer, Derwall, & Hann, 2009; DeMedeiros
& Da Dilveira, 2007). We operationalized firm risk by the variance in stock returns, a
widely-used market-based indicator of a firm’s volatility-related risk. Variance in stock
returns was computed as the standard deviation of the underlying stock price’s daily
logarithmic returns, for the previous 60 months (Black & Scholes, 1973).
Finally we controlled for the industry in which firms primarily operated, because
different industries employ different technologies and are situated in different
institutional environments and these differences may be reflected in employment
relations. Specifically, extant research has found different pay-performance relationships
for high versus low technology firms (Siegel & Hambrick, 2005). We operationalized
industry type by creating a dummy variable that was coded 1 for high technology firms
and 0 otherwise.
Sample means, standard deviations, and correlations for all variables included in
Study 1 are presented in Table 1. To examine if CEO compensation was related to the
treatment of lower level employees, we conducted step-wise regression analysis (Cohen
and Cohen, 1983) on callousness, including only the controls in Step (i) and introducing
the independent variable of interest, CEO compensation, in Step (ii). The results are
presented in Table 2. As can be seen from the table, the results are consistent with
When executives rake in millions 16
Hypothesis 1. The main effect of CEO compensation was positive and statistically
significant (β = .14, t = 2.13, p < .05). The more salary and bonus a firm bestowed on its
CEO, the more callously the firm treated its lower level participants. Further, the impact
of CEO compensation was net of the effects of several other theorized predictors of the
callous treatment of employees. Firm age and ROA had a positive, significant influence
on callousness whereas firm size had a negative influence. Firms that were older and
exhibited a higher return on assets treated their employees more callously. Firms that
were large treated their employees less callously. While the age effect was in the
predicted direction, the performance and size effects ran counter to expectations. Below,
we build on this troubling but interesting set of results by moving into the laboratory to
more carefully address the issue of causality.
STUDY 2: LABORATORY EXPERIMENT
Study 1 indicated that high levels of CEO compensation are associated with the
callous treatment of lower level employees. By incorporating a variety of controls, we
reduced the possibility that this relationship was spurious. By using lagged values of
CEO compensation we limited the possibility of reverse causality. But no archival study
can completely rule out the possibility of spurious associations and reverse causality.
Thus, we also conducted an experimental study, which while sacrificing external validity,
allowed for a more controlled test of our argument that high top manager compensation
leads to the callous treatment of lower level employees.
Study 2 was designed to simulate key aspects of the context in which top
managers likely interpret their compensation. Managers likely view their compensation
as a consequence of their prior successful performance and attainment of an elevated
When executives rake in millions 17
position in the organizational hierarchy. Thus, we began the experiment with a contest in
which subjects competed against and invariably defeated (fictitious) others for
assignment to the managerial role and receipt of an experimentally manipulated level of
compensation. The study was also designed to simulate managers’ relationship with
lower level employees. Thus, we subsequently informed subjects that they would
perform managerial duties, while their subordinates would perform a series of mundane
tasks. Further, we told subjects that they would receive a (disproportionate) share of the
profits generated by their subordinates’ work. Finally, the study was designed to provide
subjects with an opportunity to treat callously others who they believed were their
subordinates. Thus, we required subjects, all of whom had won a contest, been assigned
to a managerial role, and had been allocated an experimentally manipulated salary, to
either retain or fire their subordinates based on their assessment of the subordinate’s
performance. Summary dismissal is one of several types of harsh treatment that
Greenhouse (2008) documents in his book on the contemporary US working class. Thus,
in Study 2 we test the following second hypothesis:
Hypothesis 2: Subjects assigned to the manager role and who receive high levels
of compensation will be more likely to fire their subordinates than
subjects/managers who receive lower levels of compensation.
The goal of Study 2 was to establish causality and ecological validity was not of
primary importance. Specifically, the context varied from real world relationships
between top managers and lower level employees in two respects. First, the subjects
were told that the others against whom they competed (and compared to whom they
supposedly outperformed) for assignment to the managerial role were subsequently
When executives rake in millions 18
assigned to be their subordinates. Second, the subjects then were asked to either retain or
fire those subordinates based on their performance. Few top managers of large
organizations engage in direct competition for advancement against others who
ultimately occupy low-level positions. And few top managers of large organizations
make decisions to hire specific low-level employees. We designed the study in this way,
sacrificing realism, to make the experiment a conservative test of the hypothesis. By
minimizing the social distance between the subject and the employee, we made it more
likely that subjects might feel social pressure to treat the employees less callously.
Sixty-two students (41 men and 21 women) enrolled in undergraduate
organizational behavior classes at a university in the U.S. participated in the experiment
and received course credit for their participation. Based on the number of points
accumulated during the experiment, one participant out of every ten received $10.
On arrival at the laboratory, participants were told that they were going to
participate anonymously in a game with participants at another university. They were
told that there were 3 parts to the game. In Part 1, they would be asked to solve simple
anagrams. Their performance on the anagram task would be compared with that of a
participant at the other university, and based on their relative performance, participants at
each university would be given points and assigned the role of either a manager or an
employee to be played out in Parts 2 and 3 of the game. Participants then solved
When executives rake in millions 19
anagrams for 5 minutes as Part 1 of the experiment. Unknown to the participants, they
were always assigned the role of manager.
Next, participants were told that in order to simulate the conditions in real world
organizations, in Parts 2 and 3 of the experiment, they (as “managers”) would perform
managerial tasks while the paired participant at the other university (as “employees”)
performed non-managerial tasks. Specifically, they were told that the employee would
solve some simple mazes for 10 minutes and based on the performance of the employee
on the maze task, the organization would make profits as per the profit matrix illustrated
in Appendix B. Participants were also informed that solving mazes required a different
set of skills compared to solving anagrams, and that performance on one task was
uncorrelated with that on the other. This was done to reduce the chance that those in the
high relative compensation of manager condition did not form any apriori expectations
regarding employees’ performance in the subsequent task.
Participants further were told that at the end of Part 2 of the experiment, after the
performance of the employee and the associated profits of the organization were
determined, the results would be communicated to the manager. The manager would
receive 20 percent of company profits while the employee would receive 10 percent of
the profits. The manager would then decide whether or not to retain the employee for the
last part of the experiment, that is, Part 3. Subjects were told that if they decided to fire
the employee, the experimenter would randomly assign a new employee to the manager
for Part 3. Depending on whether the employee from Part 2 was retained or not, the
previous employee or a newly assigned employee then would solve mazes for 10 minutes
in Part 3 and based on the matrix described previously, the organization once again
When executives rake in millions 20
would make profits, twenty percent of which would be given to the manager and ten
percent to the employee who had solved the mazes. Participants were specifically
instructed that if an employee was not retained for Part 3 of the game, that employee
would not take any further part in the game. In other words, fired employees would
neither have an opportunity to solve any more mazes nor make any more points, and thus
be less likely to receive the $10 at the end of the experiment.
This experiment employed a single factor between participants design with two
levels of the manipulated variable. After subjects completed the anagram task and were
cast in the managerial role, they were assigned to one of two relative compensation
levels. Those in the high relative compensation of manager condition were told that they
had solved one anagram more than the participant at the other university and had earned
65 points, whereas the participant at the other university had earned 15 points and been
assigned the role of employee. Those in the low relative compensation of manager
condition were also told that they had solved one anagram more than the participant at
the other university and had earned 65 points, whereas the participant at the other
university had earned 60 points and been assigned the role of employee. We measured
manager compensation in comparative terms, relative to employee compensation,
because it was not feasible to offer subjects a level of compensation that subjects would
universally be perceived as high in absolute terms. We consider the possible significance
of the alternative measures of compensation used for the archival and experimental
studies in the conclusion of the paper.
When executives rake in millions 21
At the end of Part 2 of the experiment, all participants (managers) were told that
their employee’s performance was average and that the organization’s profit was hundred
points. At this point, managers decided whether they wanted to retain their employee or
not. Subjects who decide to fire their employees could be considered to have treated their
employees more callously than those who decide to retain their employees, insofar as all
subjects were told that their employees had performed average and generated the same
amount of profit. The decision to fire an employee was coded 1 and the decision to retain
an employee was coded 0.
As in the case of the archival study, we controlled for subjects’ gender because as
mentioned previously, many, albeit not all, previous studies have shown women to be
more ethical than men (Tenbrunsel & Smith-Crowe, 2008). Male subjects were coded 1
and female subjects were coded 0.
Table 3 provides the means, standard deviations, and correlations among the
study variables. To investigate whether subjects in the high relative compensation
condition were more likely than those in the low relative compensation condition to fire
their employees, we conducted a logistic regression with managers’ callousness (i.e.,
firing decision) as the dependent variable and their relative compensation and gender as
predictor variables. The results are presented in Table 4. As can be seen from the table,
the results are consistent with Hypothesis 2. We found a main effect of compensation on
callousness (Exp[b] = 3.11, p < .05). As shown in Figure 1, higher relative compensation
led to higher rates of firing, with 67.7 percent of subjects electing to not retain employees
When executives rake in millions 22
in the higher relative compensation condition compared to 38.7 percent in the lower
relative compensation condition. We also found a main effect of gender on the firing
decision, with male subjects firing their employees at a higher rate. This effect was,
though, only marginally significant (p < .10).
The appropriateness of the amount of pay an executive typically makes is a hotly
debated topic both within academia and in the popular media (see, for e.g., Gerhart,
Rynes, & Fulmer, 2009; Khurana, 2001; Morgenson, 2005). Whereas traditionally,
researchers tended to focus on whether higher executive pay leads to superior firm
performance, the ethics of executive compensation is a burgeoning research topic (e.g.,
Boyer, 2005; Davis, Payne, & McMahan, 2007; Perel, 2003; Rodgers & Gago, 2003).
Within this domain, researchers chiefly have concentrated their efforts on issues such as
conflict of interest in the way that executive pay is determined, how executives are
susceptible to temptations such as inflating short term gains in order to reap quick
rewards, or how the widening income disparity between executives and average workers
fuels perceptions of inequity among the latter and demotivates them (Saez & Piketty,
2007; Schor, 1998; Wade, O’Reilly, & Pollock, 2006). We have introduced to this
conversation a fresh perspective linking excess executive compensation to subsequent
callous behavior toward rank-and-file employees.
In this paper, we suggested that increasing executive compensation has
implications for the way that executives treat employees lower down in the organizational
hierarchy. More specifically, excessively high pay may lead executives to experience
high levels of power over other organizational members and consequently cause them to
When executives rake in millions 23
objectify lower level employees and behave meanly toward them. Across an archival
study and a laboratory experiment, we found converging evidence that lent empirical
support to our hypotheses. By doing so, we have brought to light an as yet unexplored
dimension to the debate on the pros and cons of high executive compensation. We have
argued that in addition to examining the links between executive pay and a firm’s
financial success, it is important to consider a thus far unreported ethical implication of
high executive compensation—that executives with very high income may treat
Theoretical and practical implications
This paper contributes to the literatures on compensation, ethical decision making
and human resource management in three important ways. First, our work explains how
the compensation of top managers can provide an important context for ethical decision-
making. Managers appear to be influenced by their compensation levels when choosing
human resource policies that treat employees callously, such as approving of poor
employee health and safety standards, under-funded benefit pension plans, and decisions
to fire employees. The data suggest that perceived power differentials arising out of gross
income inequality may be partially responsible for these effects.
Our results are both consistent with and go beyond a number of recent findings.
For example, Vohs, Mead and Goode (2006) found that research participants exposed to
a money prime (e.g., a picture of currency) were less helpful to others compared to those
who were not. As another example, Kouchaki, Smith-Crowe, Sousa, and Brief (2010)
found that participants exposed to a money prime adopted a “business decision frame”
(Tenbrunsel & Messick, 1999) and, on a subsequent task, cheated. This research
When executives rake in millions 24
suggests that money per se may stimulate inappropriate behaviors, but does not speak to
the impact of increasing levels of compensation. DeVoe and Peffer (2010) show that
people who experience growth in annual income feel greater time pressure and
experimental subjects who receive elevated levels of compensation behave more
impatiently. This research suggests that high levels of compensation can influence top
manager behavior, but does not focus on unethical behavior.
Second, this paper provides a robust combination of laboratory and archival data
to identify how high managerial compensation might influence decisions that impact
employee relations. The existing empirical evidence on the effects of priming people with
money-related ideas and power comprises chiefly of data from laboratory experiments, a
strategy that has the advantage of establishing causality, yet suffers from questions of
applicability to everyday organizational settings. Our methodological pairing utilizes the
precision offered by the lab while demonstrating the applicability of the findings to firm
The present work also has important implications for corporate governance by
showing that the compensation of top managers can directly influence how lower level
employees are treated within the corporation. Our research suggests that high top
manager compensation can affect negatively the employment blueprints used by a firm.
A potential remedy might be to follow Plato’s recommendation that the highest paid
worker in an economy ought not to make more than five times the pay earned by the
lowest paid worker (Crystal, 1991). More realistically, J. P. Morgan declared that top
managers’ compensation should be pegged at twenty times the wage of an average
worker (Crystal, 1991) and indeed, at Whole Foods Market this is the case. A radical
When executives rake in millions 25
alternative might be that top managers be required to donate earnings above and beyond a
pre-set level to a public charity of their choosing (Desai et al., 2009). Such a strategy has
been previously tried at the investment bank, Bear Sterns, which required its top earners
to donate 4 percent of their salaries to charity and enforced the requirement by checking
employees’ tax returns. More recently, Goldman Sachs is making news for considering a
similar charity requirement plan (Story, 2010). Such a requirement would allow for
organizations like Goldman Sachs to continue showing their appreciation of the fine work
done by their top managers and motivate them extrinsically while simultaneously curbing
the power they could have amassed due to excessive accretion of wealth.
Avenues for future research
The present research must be qualified in light of various limitations, which offer
valuable suggestions for future research. Although we believe that we have provided
strong evidence that high levels of top manager compensation lead to the callous
treatment of lower level employees, we recognize that we have by no means fully
explored this relationship. At least three important questions remain to be addressed.
First, we need to develop a better understanding of the mechanisms through
which high top manager compensations levels might lead to the callous treatment of
lower level employees. In particular, we need to determine whether highly compensated
top managers treat their employees callously because they possess and/or perceive
themselves to possess high levels of power. With this in mind, we conducted a
supplemental analysis that addressed this question in a preliminary fashion. As detailed
above, after Part 1 of the experiment subjects were told that that they and their fictitious
When executives rake in millions 26
employees would participate in two subsequent parts of the experiment, during which
subjects would perform managerial duties and their employees would solve mazes. And
after Part 2 of the experiment, the subjects were asked to decide whether to fire or retain
their employees for Part 3 of the experiment. The subjects’ decision to either fire or
retain their employees affectively ended the experiment for the purposes of the analyses
reported above. But for the purpose of the supplemental analysis discussed here, subjects
were asked to follow through with Part 3 of the experiment, which only entailed
remaining in the laboratory to receive an update on their retained or new employees’
performance and the profit it generated. Then all subjects were asked to fill out a brief
questionnaire that contained two items designed to tap into perceptions of power
(Schubert, 2005) and a few filler items. The two items measuring perceptions of power
were “I felt powerful in my role” and “I felt weak in my role” [reverse coded].
Responses to these items ranged from 1 = strongly disagree to 7 = strongly agree (r =
We used subjects’ responses to the two post-experimental questionnaire items to
examine the possibility that perceptions of power mediated the relationship between
relative compensation of manager and the callous treatment of lower level employees, we
conducted mediational analysis (Baron & Kenny, 1986)4. First, we conducted an
3 The .54 correlation between these two measures was similar to the .50 correlation found by Schubert
4 We also conducted mediation analysis based on bootstrapping techniques (10,000
iterations) using a macro provided by Preacher and Hayes (2004). Perceived power was
positively associated with relative compensation (B=2.19, t=4.68, p=.000) and also with
callousness, (B=1.2, t=2.25, p=.02). As we predicted, relative compensation had a
positive indirect effect on callousness (.49). The formal two-tailed significance test
demonstrated that the indirect effect was significant (Sobel z=1.09, p=.015). Bootstrap
results confirmed the Sobel test, with a bootstrapped 95% CI around the indirect effect
not containing zero (.21, 1.96).
When executives rake in millions 27
analysis of variance with perceived power as the dependent variable and relative
compensation of manager and gender as the independent variables (overall F(3, 59) =
11.11, p < .001, adjusted R2 = .33). Gender had a significant main effect on power such
that men perceived higher levels of power (M = 11.20, SD = .28) as compared to women
(M = 9.80, SD = .38). More importantly, as predicted, higher relative compensation of
manager resulted in greater perceptions of power (M = 11.47, SD = .35) compared to low
relative compensation of manager (M = 9.52, SD = .32). We then conducted a
hierarchical, logistic regression analysis on meanness, entering the predictor variables in
the following order: (i) control variable – gender, independent variable – relative
compensation; and (ii) mediator – perceived power. The results of this 2-step regression
are provided in Table 4. As reported in the table, in Step (i), we found the hypothesized
direct effect of relative compensation of manager on meanness (Exp[b] = 3.11, p < .05)
such that higher relative compensation of manager lead to more meanness. On
introducing the mediator in Step (ii), the direct effect of relative compensation of
manager became considerably smaller and insignificant (Exp[b] = 1.33, p = .67), whereas
indirect effect of perceived power was significant (Exp[b] = 1.58, p < .05), thereby
suggesting the perceived power fully mediated the relationship between relative
compensation of managers and callous treatment.
This analysis, of course, suffers from its fair share of limitations. For instance,
one weakness was that subjects were asked to respond to the self-perception of power
survey items after they had decided whether or not to fire their employees. It is possible
that the experience of deciding whether or not to fire an employee caused subjects to feel
When executives rake in millions 28
powerful. If so, it is possible that in the high compensation condition subjects’ self-
perception of power stemmed not from their elevated relative compensation but rather
from their experience deciding whether or not to retain their employee.5 Unfortunately,
we could not ask subjects to respond to the two power items before asking them to decide
whether or not to retain their employees for Part 3 of the experiment, because doing so
would have confounded the high/low relative compensation manipulation with an
intervention that primed subjects’ awareness of their power. Future researchers should
pursue this question with a superior design.
Second, we need to explore the possible moderators of the relationship between
top manager compensation and the callous treatment of employees. While high levels of
compensation may increase a top manager’s propensity to treat their employees callously,
some top manager attributes and top management contextual features may attenuate or
intensify this effect. We also conducted supplemental analyses that addressed this
question, again in a very preliminary fashion.
As described above, we controlled for CEO and subject gender in the archival and
experimental studies reported above. And while we found that firms run by female CEOs
exhibited lower scores on the KLD derived callousness measure and that female subjects
were less likely to fire their fictitious employees, only the latter effect was statistically
significant at conventional levels. Thus there is some evidence that female top managers
5 We can say, though, that the experience of firing an employee (as opposed to the decision whether or not
to fire an employee) was not responsible for the relationship between high levels of compensation and the
self-perception of power. Subjects in the high relative compensation condition exhibited high levels of
perceived power, even controlling for the variable that indicated whether or not subjects fired their
When executives rake in millions 29
treat their employees less callously than male mangers do, even when they earn as much
as male top managers do (which research suggests tends not to be the case). But does the
gender of the top manager moderate the effect that top manager compensation has on the
treatment of lower level employees? Researchers have demonstrated that men and
women respond differently when they experience power (e.g., Bugental, Beaulieua,
Schwartza, & Dragosits, 2009). Perhaps by extension, men and women respond
differently when in receipt of high levels of compensation. If so, might female top
managers be less susceptible to the effects of high compensation levels compared to male
We explored this possibility be adding variables for the interaction of high
compensation levels and gender to the statistical models estimated for our two studies. If
women managers are less susceptible to the effects of high compensation levels, these
interaction terms should have a negative effect on the callous treatment of lower level
employees (net of the main effects of high compensation levels and gender). We did not,
though, observe an interaction of CEO gender and compensation in the archival study.
Further, we did not observe any interaction of subject gender and compensation in the
experiment. Researcher should explore the possible moderating effects of gender more
comprehensively in the future, as well as the possible moderating effects of other top
manager attributes and contextual factors surrounding upper echelons.
Alternative Compensation Metrics
Finally, we need to explore the functional form of the effect that high levels of top
manager compensation have on the treatment of low-level employees. Above, we said
that most theory either implicitly or explicitly assumes that people evaluate their
When executives rake in millions 30
compensation compared to some benchmark; most obviously, relative to subordinates,
relative to others of similar rank, and relative to past levels of compensation. In Study 1
we side-stepped this issue by measuring compensation in absolute terms and then
maintaining that the more CEOs earned in absolute terms, the more they likely made in
comparative terms; that is, relative to subordinates and other CEOs in the year of the
study and relative to themselves in previous years. In Study 2 we measured
compensation relative to a specific benchmark, subordinates, maintaining that measuring
compensation in absolute terms was not feasible in the experimental context. Clearly,
though, future theory and research should consider how the relationship between top
manager compensation and the treatment of low level employees might vary depending
on the benchmark against which compensation is measured.
More fundamentally, our theoretical arguments and empirical studies assume that
the relationship between top manager compensation and the treatment of lower level
employees is monotonically smooth. We argue and test the hypothesis that the more top
managers are paid, the more callously they treat their subordinates. We suspect, though,
that top manager compensation must exceed some threshold, either in absolute or relative
terms, before it provokes callous treatment of employees. Future research addressing
these issues could provide additional evidence on the high compensation-callousness
relationship and strengthen the contribution of the present work.
In closing, we have presented a case against rising executive compensation. We
have argued that rising top manager pay results in power asymmetries in the workplace
such that top executives come to view lower level workers as dispensable objects not
When executives rake in millions
worthy of human dignity. We presented the results from an archival study that show that
high top manager compensation subsequently results in poor employee treatment, despite
controlling for various and firm and industry specific variables. We also presented
results from a laboratory study that show that increasing income disparities between
managers and workers results in managers perceiving greater power, and treating workers
meanly. Taken together, the evidence from the two studies is compelling. We have
offered some solutions to remedy the problem of meanness in corporations. At a time
when business leadership has come to be synonymous with worker exploitation, both
internal organizational policies and government legislation need to be reformulated to
protect workers, lest the moral outrage at the indignities suffered by them lead to a
rebellion against corporate America (e.g., Kasser, Cohn, Kanner, & Ryan, 2007).
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Performance of employee
Profit earned by the
organization (in points)
Below average (4 mazes and below)
Slightly below average (5 to 10 mazes) 70 points
Average (11 to 20 mazes) 100 points
Slightly above average (21 to 26 mazes) 130 points
Above average (26 mazes and above) 190 points
When executives rake in millions 43
Correlational analysis of included variables (Study 1).
Mean SD 1 2 3 4 5 6 7 8
2. Firm age
3. Firm size
5. Tobin’s Q
6. Firm risk
7. Industry dummy
8. CEO gender
0.28*** -0.01 -0.03
-0.12* 9. CEO compensation (in thousands of 2007 USD) 777.48 649.55 0.07 -0.02 0.06
Note. All tests of variables are two-tailed (N = 261).
†p ≤ .10; *p ≤ .05, **p ≤ .01, ***p ≤ .001
When executives rake in millions 44
Summary of hierarchical regression analysisa of callousness (Study 1).
Firm age 0.14*
Adjusted R2 (%)
Note. All tests of variables are two-tailed (N = 261).
aBeta coefficients are standardized.
*p ≤ .05; **p ≤ .01.
When executives rake in millions 45
Summary statistics and correlations (Study 2)
Mean SD 1 2 3
2. Relative compensation of
0.65 0.48 -
- - 0.14 -
3. Perceived power 10.71 2.09 0.38** 0.49***
Note. All tests of variables are one-tailed (N = 62).
†p ≤ .10; *p ≤ .05; **p ≤ .01
0.22 0.42 0.25* 0.29* 0.52***
When executives rake in millions
Summary of logistic regression analysis of callousness (Study 2)
Predictors B SE B Wald’s
df p e B(Odds
Constant -1.063 0.528 4.05 1 0.044 0.345
Gender 0.988 0.571 2.988 1 0.084 2.685
1.135 0.546 4.316 1 0.038 3.111
χ2 df p
0.573 2 0.751
Cox and Snell R2 =
Nagelkerke R2 =
Note. All statistics reported herein use 3 decimal places in order to maintain statistical precision. N = 62.
When executives rake in millions 47
Summary of hierarchical logistic regression analysis of callousness (Study 2)
Step 1 Step 2
0.457 0.178 6.622
1 0.010 1.580
χ2 df p df p
0.573 2 0.751 5.982 7 0.542
Cox and Snell R2 = 0.127 Cox and Snell R2 = 0.228
Nagelkerke R2 = 0.169 Nagelkerke R2 = 0.304
Note. All statistics reported herein use 3 decimal places in order to maintain statistical precision. N = 62.
When executives rake in millions 48 Download full-text
Effect of relative compensation of manager on callousness (Study 2)
% of managers who fired their