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For once, let's briefly set aside the debate over whether CEOs deserve their often astronomical compensation. Instead, let's tackle an interesting spin on the question: What effect do these fat paychecks have on executives' souls?
Scoring the meanness factor
According to a recent blog post from the Harvard Business Review, researcher Sreedhari Desai contends that high levels of compensation make corporate leaders more ruthless, thus leading to poor treatment of workers and other negative outcomes.
Desai crunched data from socially responsible investing firm Kinder, Lydenberg, Domini & Co., popularly known as KLD, to compute a "meanness score" for firms. The higher a company's executive compensation, Desai discovered, the higher its score.
She also reported "disheartening" results from her own lab tests on the ability of individuals in power to lie, tying her findings into past research on the nature of power. According to "power holding theory," human beings in positions that give them control over others often find ways to rationalize some of the unpleasant, unethical things they do. Executives' staggering salaries may be cushioning them from the realization of their own fundamental unkindness.
Is CEO compensation a race to the top ... or the bottom?
If Desai's theory is true, it could explain the recent escalating outbreak of bad behavior in corporate America.
According to the AFL-CIO's executive compensation data, in 2008 the average CEO made 319 times as much as the average worker. That's well off 2000's bubbly high of 525 to 1. However, in 1990, the ratio was 107 to 1. And if you flash back to 1980 (skip the shoulder pads and big hair, please), that ratio was a modest 42 to 1.
Thankfully, out-of-control CEO pay has recently taken the spotlight, amid historic shareholder votes to reject policies that disconnect payment from performance. Investors at Abercrombie & Fitch (NYSE: ANF ) , Motorola (NYSE: MOT ) , and Occidental Petroleum (NYSE: OXY ) all smacked down imprudent executive pay plans this year.
Meanwhile, several companies have taken a more "stakeholder-driven" approach to their businesses. Costco's (Nasdaq: COST ) Jim Sinegal has always been known as a modestly paid and excellent corporate manager. Whole Foods Market's (Nasdaq: WFMI ) John Mackey, a proponent of conscious capitalism, has also stuck with modest compensation; Whole Foods caps executive salaries at 19 times the average worker's pay. Both Mackey and Sinegal have built and/or run great businesses, while rejecting the temptation to excessively enrich themselves at workers' expense.
Greed gets the blame for much of our current market mayhem, but hubris and arrogance may be even more responsible. Desai's data correlating compensation and cruelty could explain corporate America's excess of failure, occasional flirtations with fraud, and lack of restraint and remorse. Look no further than financial companies like AIG (NYSE: AIG ) , which insisted on hefty paychecks last year despite receiving taxpayer bailouts.
Executives absolutely deserve to be paid well for high-quality work. Otherwise, why would anyone even consider doing a good job? However, CEOs who demand too much pay for too little performance, to the detriment of workers and shareholders alike, may be letting their power go to their head. Under a heartless, capricious CEO, quality could suffer, more mistakes might be made, employees would feel demoralized and abused, and shareholders would likely lose their shirts.
"Power, Corruption, and Lies" -- it's an awesome title for a classic New Order album, but it makes a lousy way to run a business.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.