CEOs Behaving Badly

What a chief executive’s golf game and handwriting say about his compensation—and his leadership

Marco Goran Romano

As ceo compensation at the country’s top firms has surged—up nearly 1,000 percent in the past 35 years, blowing past economic growth—so too has a line of research dedicated to the rites and customs of the average corner-office occupant.

He—and it is almost always a he; the S&P 1500 includes fewer companies led by women than by men named John—looks unusually competent, even if he isn’t [1]. The odds that he holds an M.B.A. are about 50 percent, up from 10 percent in the mid-20th century (when CEOs were more likely to have a graduate degree in fields like law and engineering) [2]. He stands to earn more if he has a deep voice [3], impressive contacts [4], a large signature [5], or a superior golf game [6].

Speaking of golf: Though spending time on the green may be good for a CEO’s paycheck, some studies warn that it may not be so good for his company. Golf skills have been negatively associated with stock returns, as has personal use of a corporate jet (which correlates with membership in faraway golf clubs) [7]. Then again, even professional achievement can backfire on shareholders: Stock prices also tend to drop after a CEO wins a prestigious award—perhaps because such awards often bring with them distractions like book contracts and seats on outside boards [8].

Financial rewards, too, might have an adverse effect on CEO performance. One working paper found that firms led by highly compensated executives fared worse in terms of future stock prices than did similar firms offering more modest compensation. Larger paychecks weren’t associated with better work, the researchers found, but instead with inflated self-confidence and risky investments [9]. Other studies suggest that compensating a CEO with stock options—which become more valuable as a stock’s price rises, but don’t cost him anything if the stock’s price falls—increases the likelihood of product recalls [10] and shareholder lawsuits [11].

Fortunately, even corporate bosses have to answer to people outside the company. Married CEOs tend to have lower appetites for risk than single ones, and produce less volatile returns for investors [12]. And firms with higher levels of media scrutiny make more-altruistic decisions—suggesting that CEOs, like the rest of us, behave better when others are watching [13].

The Studies:

[1] Graham et al., “A Corporate Beauty Contest” (Management Science, forthcoming)

[2] Frydman, “Rising Through the Ranks: The Evolution of the Market for Corporate Executives” (working paper, Sept. 2015)

[3] Mayew et al., “Voice Pitch and the Labor Market Success of Male Chief Executive Officers” (Evolution & Human Behavior, July 2013)

[4] Engelberg et al., “The Price of a CEO’s Rolodex” (The Review of Financial Studies, Jan. 2013)

[5] Ham et al., “Narcissism Is a Bad Sign: CEO Signature Size, Investment, and Performance” (working paper, June 2014)

[6] Kolev and Hogarth, “Illusory Correlation in the Remuneration of Chief Executive Officers: It Pays to Play Golf, and Well” (working paper, July 2010)

[7] Yermack, “Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns” (Journal of Financial Economics, April 2006)

[8] Malmendier and Tate, “Superstar CEOs” (Quarterly Journal of Economics, Nov. 2009)

[9] Cooper et al., “Performance for Pay?” (working paper, Oct. 2014)

[10] Wowak et al., “Throwing Caution to the Wind: The Effect of CEO Stock Option Pay on the Incidence of Product Safety Problems” (Strategic Management Journal, July 2015)

[11] Peng and Röell, “Executive Pay and Shareholder Litigation” (Review of Finance, Jan. 2008)

[12] Roussanov and Savor, “Marriage and Managers’ Attitudes to Risk” (Management Science, July 2014)

[13] Borghesi et al., “Corporate Socially Responsible Investments” (Journal of Corporate Finance, June 2014)