Missing sweet spot in top executive compensation could cost firms millions, research shows

LAWRENCE – As multimillion-dollar compensation packages of top-level executives come under fire, questions have emerged about the link in C-suite offices between pay and performance. When it comes to chief marketing officers (CMOs), research from the University of Kansas found that compensation isn’t arbitrary, and paying too much — or too little — could cost firms millions of dollars.

“The public perception, and even the perception of some academics, is that top officer pay is not driven by performance — that some C-suite officers are paid more just because they are cozy with the board or friends with the CEO,” said Jide Wintoki, associate professor of finance, who collaborated with Kissan Joseph, professor of marketing and Stockton Faculty Fellow at the School of Business.

“We show that firms are tailoring the contracts and compensation of CMOs to actually match what they do,” Wintoki said.

The research will be published in Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences. Joseph and Wintoki partnered on the research with Naresh Bansal at Saint Louis University and Minghui Ma at Appalachian State University.

Analyzing more than 9,000 firm-years of data from S&P 500 companies in the years between 1992 and 2013, researchers found the average total compensation for a CMO was more than $1.5 million. About half of that, roughly $750,000, was incentive compensation.

CMO salaries correlate closely to their role in the firm, the data showed.

“What drives the level of pay is very systematic,” Joseph said. “CMOs who have advertising responsibilities, oversight of R&D functions and work in highly competitive markets are paid more.”

The research also found that providing compensation packages that weren’t in line with appropriate levels had significant adverse consequences. A deviation of 10 percent from the appropriate level of incentive compensation, or about $75,000, saw a 2.4 percent decline in the firm’s stock market value. That translated to an effect of about $40 million for the average firm in the research sample. Notably, the $40 million hit occurred for CMOs who were both under and overpaid.

“It’s extremely important to find the sweet spot in CMO compensation,” Joseph said.

While it is easy to understand why a CMO who is paid less delivers less, the explanation on the other side is a little more complex.  

“Essentially, with excess compensation, you lose the link between pay and performance,” Wintoki said. “Managers are not motivated to improve their performance because they are already getting paid more than they should be given their level of performance.”

Among top-level executive positions, the researchers picked CMOs because it was easiest to see the link between their responsibilities and pay. But the research, Joseph said, could have implications beyond CMO compensation.

“The results paint a broader story that incentives do matter, especially for C-suite officers. If they aren’t paid appropriately on either side, firm performance is going to be impacted,” Joseph said. 

Photos: Jide Wintoki gives a class lecture; Kissan Joseph. Photos via KU Marketing Communications.