Proving CEOs Overpaid for Luck Helped Stir Pay Backlash
Marianne Bertrand helped unleash a shareholder backlash against CEO pay with research she began while still in graduate school.
In a 2001 paper based on her work as a Ph.D. candidate at Harvard University, the 43-year-old labor economist documented that chief executive officers at U.S. oil companies got raises when their company’s fortunes improved because of changes in global oil prices beyond their control. The same pay-for-luck phenomenon occurred with multinational businesses when currency fluctuations, rather than management strategies, boosted results, she found.
“Marianne’s work challenged conventional thinking about executive compensation and corporate governance,” said Glenn Davis, director of research for the Washington-based Council of Institutional Investors.
Her research has influenced shareholder advocates who debunk arguments that CEO pay is an effective means of providing incentives or rewarding performance, said Nell Minow, founder and a director of GMI Ratings, which evaluates governance risk at public companies.
“I am a great fan of Bertrand’s work,” Minow said. “Her analysis is compelling in showing that a significant portion of pay at the highest levels is related to overall market or sector performance and not the performance of the individual company, much less the individual executive.”
In the wake of shareholder concerns, the U.S. Securities and Exchange Commission in July 2006 approved the most extensive overhaul of executive-pay rules in more than a decade, requiring companies to report the total compensation for their five highest-paid officials, including salaries, benefits and stock. In January 2011 the agency gave investors the right to weigh in on pay packages.
Bertrand’s influence extends beyond helping to shape the debate over CEO compensation and disclosure. Her work on the U.S. labor market revealed that managers show racial bias despite laws prohibiting discrimination. She has demonstrated why women continue to lag behind men in careers and pay. Her recent work also reveals the value of providing more-understandable information about consumer loans -- which may bolster regulation of payday lending.
Bertrand is “incredibly creative, innovative, and productive,” said Harvard economist Lawrence Katz, chief economist for the U.S. Labor Department in 1993 and 1994 during the Clinton administration and one of Bertrand’s professors.
A native of Belgium, Bertrand grew up helping her parents sell fish and poultry in their small shop -- an experience that gave her a sense of “what hard work is really about,” she said during an interview in her office at the University of Chicago’s Booth School of Business, where she is a professor. Her interest in labor markets was sparked in part by growing up in Europe, where she saw persistently high unemployment, especially among young people.
She entered the Universite Libre de Bruxelles intending to become a journalist. On the advice of an economics professor she considers a mentor, she switched majors, partly because “I love trying to understand the data,” and economics seemed to offer the opportunity for “detective work similar to investigative journalism.” Her mentor also encouraged her to go to Harvard in Cambridge, Massachusetts, for her doctorate, which she received in 1998.
While many economists make a mark by focusing on a particular area -- monetary policy or financial regulation, for example -- Bertrand says she’s adopted an initially “risky strategy” by addressing social topics that interest her. Hiring bias has been a particular focus, though most practices today are more subtle than “old-school discrimination” which is illegal, she said.
In one field experiment, she and Harvard economics professor Sendhil Mullainathan sent fictitious responses to 1,300 help-wanted ads in Boston and Chicago newspapers. Using similar resumes, they randomly assigned names that were black-sounding, such as Lakisha and Jamal, or white-sounding, such as Greg and Emily. Letters with “white” names received 50 percent more callbacks -- a result she and Mullainathan described in a paper.
Their findings were “disturbing” and hard to dispute because they submitted almost 5,000 applications over a year, Alan Krueger, former chairman of President Barack Obama’s Council of Economic Advisers, wrote in a New York Times commentary.
The experiment showed the importance of equal-opportunity laws, said Ariane Hegewisch, study director for the Washington-based Institute for Women’s Policy Research. “The research on discrimination in recruitment” is “very helpful when confronted with skeptics who believe that there no longer is a need for active enforcement of equality of opportunity.”
Increased regulation also could help consumers make more informed decisions on so-called payday lending, which provides $500 or smaller loans meant to tide the borrower over until the next paycheck, Bertrand said, citing an experiment she conducted with Adair Morse, an associate professor of finance at the Booth School, where Bertrand has worked since 2000.
Customers of an unidentified lender were given various summaries of the costs of loans. Information in dollars -- as opposed to interest rates -- reduced borrowing and was the most effective message, their surveys found. Bertrand said the experiment could be duplicated by the new Consumer Financial Protection Bureau, created by the Dodd-Frank overhaul of financial regulation.
The research shows that giving consumers “meaningful insight into the consequences of their financial decisions makes a real difference in outcomes,” said Michael Barr, a University of Michigan law professor who helped to draft the Dodd-Frank legislation as a Treasury Department official.
Bertrand’s work has won recognition from her peers, including the 2004 Elaine Bennett Research Prize, presented for “outstanding contributions by young women in the economics profession,” and the 2012 Sherwin Rosen Award for outstanding contributions to labor economics, which cited her CEO pay and discrimination studies.
Her focus in recent years has centered on the role of women in the workplace and provides a counterpoint to the view expressed by Facebook Inc. (FB) Chief Operating Officer Sheryl Sandberg, author of the bestselling book “Lean In.” Sandberg urges women to pursue their careers aggressively, for example by negotiating harder for pay increases.
While “the work that Sandberg did is very compelling,” Bertrand said she is “more skeptical you can undo -- just with asking for more -- all the things we see in the data. It is much more complicated than women should be more aggressive and everything would work itself out.”
One study she co-wrote with Katz and Claudia Goldin, also a Harvard economics professor, tracked the career paths of Chicago MBAs who graduated between 1990 and 2006. It found that women started with earnings averaging 88 percent of men in similar positions, with the gap quickly widening as the women took off work to become mothers, even for relatively short leaves. After a decade, their income amounted to just 55 percent of men’s.
“What explains this gap?” Bertrand said. “It is essentially children. Once children come in, these women slow down, they work fewer hours. It is hard to stay on the business-career track if you have taken time out.”
Her research suggests employers need to change workplace cultures and the government needs to strengthen its equal-pay laws, partly because “the notion of the pay gap getting larger as women’s careers progress is not unique to MBAs,” said Latifa Lyles, acting director for the women’s bureau at the U.S. Department of Labor.
The study reflects social norms that may be partly responsible in lowering women’s pay, said Bertrand, who is married and has two children, ages 3 and 6. In a separate report published in May, she and her co-authors found that couples have an aversion to a wife earning more than a husband -- so much so that when the wife’s salary approaches her husband’s, it can result in reducing her labor-force participation and marriage satisfaction and creates a higher likelihood of divorce.
Surveys suggest most women can’t “have it all,” Bertrand said. College-educated women with careers spent a larger share of their days “unhappy, sad or stressed and tired” compared with mothers who stayed home, according to data she has studied.
Bertrand says “there is no doubt” she is sometimes “stressed and frustrated” balancing her career and family, even though she’s had a nanny for the past six years.
“I have two kids, so I do lots of kids’ stuff; I watch kids’ movies,” she said. “The only thing I have tried to keep on doing, but that has been kind of crushed, is cooking because that is something I really like.”
She says she spends two days a week in class, two days with research and a day editing an economic journal during the quarters when she teaches. “A smaller and smaller part of my time is spent is research, unfortunately.”
While Bertrand says she’s never faced gender discrimination, she sees its effect in her classroom: Females participate less. In a recent elective course -- “The Firm and the Non-Market Environment” on how companies confront outside forces such as regulation, the press and interest groups -- Bertrand went over cases involving BP Plc (BP/) and Royal Dutch Shell Plc. (RDSA) She tossed out questions on their crisis management and studiously avoided showing how she felt.
During a 15-minute break in one class, she urged two Chinese women, who hadn’t contributed to the discussion, to speak up in the second half. More than 30 percent of her students are women and about the same proportion are foreign.
“Non-Americans, especially in Asia, just don’t talk that much in class -- it is just not the norm,” she said. That reluctance could hamper careers and pay. “You can imagine some workplace where they are just going to have to be more vocal” or speak up to ask for a promotion.
Bertrand says research on the “gender agenda” will be a focus in the coming year because she remains “excited” about it and has studies “in the pipeline.”
“She’s a rare economist who is not methodologically dogmatic” and can rely on existing data or set up her own experiment to address a question, said Robert Gertner, a deputy dean at the Booth School. “Her strength is identifying these very big trends that have disruptive effects and coming up with really good evidence of the complex ways in which people make decisions and behave.”
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