Researchers have confirmed a link between CEO pay and consumers' trust of their organizations, according to a series of studies published in the Journal of Business Ethics.
Ali Besherat, associate professor of marketing at the University of Denver, led the pilot study, two online experiments and an event study. The research sought to determine whether people are aware of CEO pay and consume information about it; whether CEO pay negatively affects consumer purchase intention; and how leading purchase intention shifts in relation to CEO pay when the company is undergoing a brand crisis. Sets of average consumers and business professionals with at least three years of experience were employed in the study (read more about the methodology here).
Five findings CEOs and boards should note:
1. People are aware of CEO pay and consume information about it. The media significantly impacts their knowledge: 65 percent of individuals learn about CEO pay when reading a news article, while 37 percent learn through watching the news. More than 70 percent of average consumers can correctly identify the pay range of the average Fortune 500 CEO, while more than 88 percent of business professionals can do the same.
2. CEO pay does, in fact, have a significant impact on consumer purchase intention: However, this was only present when the brand was undergoing a financial crisis. Low CEO pay increases consumer purchase intent when a financial crisis is present. This "presents a novel opportunity for Chief Marketing Officers during a crisis to elevate purchase intention by highlighting lower CEO pay," generating an opportunity to "build trust and subsequently increase purchase intention," according to the study.
3. Stronger brand equity establishes high expectations of CEO behavior, the second study found. Strong brands are also likely to drive higher consumer distrust when a highly paid CEO is performing poorly. Strong brand equity can help protect a company from the negative effects of high CEO pay, but can have a negative impact when a company has a highly paid CEO and is undergoing a brand crisis.
In other words, a strong reputation is insulating until something goes wrong for the company. Then, CEO pay can come under scrutiny.
4. The event study found that investors can penalize a company in the stock market if they believe high CEO pay in a company experiencing controversy will negatively influence consumers.
5. Consumer trust is linked to CEO pay because consumers see executive compensation as a manifestation of companies' intentions.
"When CEO pay is high and the firm is experiencing a brand crisis, consumers lose trust in the brand as these governance practices signal that the firm is operating in a self-serving, rather than consumer value-creating, manner, which subsequently reduces purchase intent," according to the study.