It appears that media criticism of companies grows when faced with incongruent signals. Reporters zoom in on them: a company guilty of an oil spill could focus media attention further by making a large contribution to Greenpeace. A firm which opens its board to equal gender representation might well prick the interest of journalists should it record a high number of litigation cases led by women. And executives who are awarded overly generous compensation could well increase rather than decrease media disapproval because of their ostentatious philanthropic gestures.
During the proxy season, when many companies hold their annual shareholder meetings, publicly traded companies disclose the pay of their CEOs. This is when journalists are likely to highlight those executives earning hundreds times more than an average employee in a non-supervisory position. In 2016, CEOs earned on average 347 times more than their median employees did. That same year, meanwhile, U.S. firms donated a total of $18.6 billion to charity.
And this is the parallel the media is not buying.
40-year-old Tradition
When Renault awarded $8 million in compensation to Carlos Ghosn in 2015, media disapproval was immediate and stinging. Articles decrying the gulf between the CEO’s compensation and the average company workers’ pay came in thick and fast, prompting the then-Minister of Finance Emmanuel Macron to criticize Ghosn’s salary as « excessive ». This despite the fact Ghosn had launched a series of philanthropic programs to support children in areas affected by the Fukushima catastrophe.
That very same year, Charter Communications paid $20 million to their CEO Thomas Rutledge and the public response was muted, if not totally absent. Strange, when, as the topic of executive compensation consistently generates big headlines in the business press. This discrepancy is no new phenomenon: in 2002, Hewlett-Packard rewarded then-CEO Carly Fiorina $13 million which sparked four times as many critical articles as those commenting on Apple’s attribution of $93 million to Steve Jobs.
In general, top-level management has witnessed two concomitant phenomena in the past 40 years: an acceleration and a transformation of CEO pay which includes stock options, tax breaks and long-term incentives. And a growing tendency towards what some are calling philanthrocapitalism whereby many firms hope to manage public perception with generous donations.
Incongruent Signals
So, why the nonlinearity? Why do some firms seem to attract more media disapproval than others when it comes to CEO compensation perceived as excessive? And, crucially, do CEO attempts at philanthropy of the kind seen recently after the Notre Dame fire in Paris, ward off such media onslaughts to the former – or catalyze them?
These are just a few questions which I attempted to answer in my 2018 paper in Organization Science, co-written by Jean-Philippe Vergne of Ivey Business School and Steffen Brenner of Copenhagen Business School. We combed through 12,573 articles in the mainstream US print media during the 1995-2006 period to ascertain the impact on media treatment of two incongruent signals – philanthropy and executive compensation perceived as excessive. The articles zeroed in on 2,240 CEOs at the helm of 1,477 publicly-listed U.S. firms. To flesh out the results of our analyses, we also interviewed eight journalists with long track records of covering CEO pay.
While this far-off period might appear detached from our own, it has important lessons to share decades later. 1995 was the year which saw a sharp increase in CEO compensation, coinciding with increased media attention. 2007 witnessed changes in disclosure rules for CEO pay which created unobservable heterogeneity. In between, we had consistent data to observe media disapproval, uncluttered by platforms like Twitter and other social media which have revolutionized this field.
Philanthropy Does Not Assuage Overcompensation
Our conclusions on what we call signal incongruence make a strong case for companies to avoid philanthropy as a panacea. A CEO’s compensation perceived as excessive did markedly sharpen media disapproval. For example, we evaluated the tone of the 12,573 articles analyzed by using an automatic Python script which identifies negatively connoted keywords. It showed that one third of the articles that coupled overcompensation and philanthropy had a negative tone.
Our empirical results were corroborated by the exchanges with the reporters. A Bloomberg reporter, requesting anonymity, told us “a story becomes more powerful with this kind of contrast” whilst Pulitzer Prize-winning Gretchen Morgenson (The New York Times) said that a “situation in which hypocritical behavior is exposed is always a good story.”
Media Power
We also noted the impact journalists have on business: a company assailed by media disapproval of overcompensation reshapes aspects of its behavior by enforcing standards of social appropriateness. The consequences can be far-reaching: departure of lower-level mangers; asset divestments; accusations by investors of poor corporate governance; difficulties in obtaining resources; and dilution of relations with board members and customers. Not surprisingly, our findings revealed that philanthropic companies often respond to media disapproval by reducing CEO overcompensation the following year.
The impact of media disapproval combines with its influence on pushing regulators to enforce corporate law or questioning the executives’ performances. As such, the media is a key information intermediary, or what has been dubbed an “infomediary”. Journalists thus contribute to the monitoring of firms and to modifying managerial incentives. In this, we believe the media can work hand-in-hand with researchers: journalists focus on the extreme cases of societal issues like CEO pay, whilst academics analyze average tendencies, often at the expense of clear-cut answers.
Cross-fertilization Between Journalists and Researchers
This complementarity between the two bodies is emphasized in our study. With the dynamic growth of data journalism and fact checking, we feel there is a need for more reflection on the untapped opportunities to cross-fertilize the media and academic fields. We hope our research contributes to a better awareness within the media of trends which have a deep impact on major business players. We also seek to make companies aware that their prosocial outreach campaigns could be undermined by what journalists perceive as contradictory behavior such as CEO overcompensation. As Sandra Guy of the Chicago Sun-Times told us: “Whether a specific … conduct would be viewed as hypocritical behavior together with the company overcompensating their top managers would depend on the specific context… (However) tying donations to big bonuses might be more likely to be perceived in a negative way.”
