Are CEOs Incentivized to Care About Their Employees?

While employees are seen as an important group of stakeholders for many firms, and prior research finds that employee satisfaction is important for firm financial and operational performance, there is a lack of evidence in the literature on how employee satisfaction plays a role in the evaluation of the top managers of the firm, including the CEO. In this study, we examine whether CEOs are rewarded by the board of directors when employee satisfaction improves and, conversely, whether they are punished by the board when employee satisfaction deteriorates.

Using annual data from the Glassdoor website, we find that firms’ employee satisfaction ratings are positively associated with CEO bonuses. We also find that employee satisfaction ratings are negatively associated with the occurrence of CEO dismissals. This provides evidence that CEOs are rewarded with higher compensation as employee satisfaction improves over time, and are punished through dismissal as employee satisfaction worsens over time. Supplementary analyses suggest that these relationships are stronger for firms in industries where human capital is more important for financial performance, firms with higher corporate social responsibility (CSR) performance, and high-reputation firms. Thus, employee satisfaction may be important to firms for different reasons – some firms may be concerned about the inherent value that employees provide to the firm, whereas other firms are focused more on being a socially responsible employer or the reputational effects of being perceived as such.

This study sheds light on the factors that shape employee satisfaction in different firms and the incentives that managers have to improve workplace policies to satisfy employees. Indeed, CEOs who have broad control over the firm’s workplace environment may have a personal incentive to ensure that employees are satisfied, as their compensation and job retention may hinge on this key outcome. This study also re-enforces the importance of employees as a key stakeholder group for firms, as the board of directors appears to recognize that their satisfaction is a valued outcome.Khaled Abdulsalam, Dane M. Christensen, Scott D. Graffin & John Li (2024). Do Boards Reward and Punish CEOs Based on Employee Satisfaction Ratings? Organization Science. DOI: 10.1287/orsc.2021.15818