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The Magic Words That Result in a CEO Pay Raise

CEO Pay RiseWhat if two magic words could raise your salary by over $116,000 per year?

SDSU management professor, Dr. Taekjin Shin and his co-author, Dr. Jihae You from Louisiana State University, found that when the words “shareholder value” were repeated at least once every 1,000 words within a written communication to board members, their compensation rose an average of $116,000 per year. The professors’ research is soon-to-be published in the Journal of Management Studies.

The researchers determined the resulting pay increase occurred even if the message was created by an author other than the CEO. “Although the CEOs may not necessarily write letters personally, once they are signed by the CEO and appear in a public domain, they are widely considered as messages from the CEO,” they wrote in their study.

Executive pay raises are usually done at the behest of the corporation’s board of directors whose members generally hold positions elsewhere or serve on multiple boards. “In theory, directors are presumed to monitor management behavior closely and determine executive compensation based on objective information,” said Shin. “In reality, various factors constrain directors’ ability to do so, mainly because they must also direct their time and energy at the other boards and the companies where they are employed.”

Additionally, the two professors found that since much of the data given to board members regarding corporate operations is complicated or incomplete, they may rely on the information in CEO letters and other communications that is generally easier to interpret in order to form opinions about management performance.

“A typical director holds a fraction of the shares of the corporate boards where they serve,” said Shin. “Our study indicated when the CEO’s use of language is shareholder-friendly it may leave an impression of management competence and effectiveness. Directors with this impression often end up granting a more generous pay package to the CEO.”

One might deduct that “activist shareholders” who may want to replace the CEO could have an impact on shareholder friendly language. An activist shareholder is defined as someone who obtains a large portion of a company’s shares with the intention of advocating for corporate change to improve stock performance.

“Close examination of corporate performance by activist shareholders may create a sense of urgency and threat among board members who rely on corporate messaging to determine management compensation,” Shin noted. “We found that the shareholder-friendly language becomes even more useful for CEOs targeted by activist shareholders, resulting in a stronger impact of the language on pay increases.”