Story by Steve Neumann
Image by iStock/Mushakesa
Bright Asante-Appiah is using a new metric that shows positive associations.
Environmental, social and corporate governance make up a set of factors that socially conscious investors use to select investments. Proponents of ESG believe it helps a company serve all stakeholders—workers, communities, customers, shareholders and the environment.
ESG is a big part of Assistant Professor Bright Asante-Appiah’s research at Lehigh, and he and Professor Tamara Lambert, both from the accounting department, have compiled new research on the “S” component of ESG that is currently in peer review.
“The focus is shifting from environmental issues to the social issues of ESG,” Asante-Appiah says, “and this is, in part, driven by the ongoing debate in America about wage stagnation despite sustained economic growth.”
The researchers hope their work will help close this gap between economic growth and stagnating employee wages by focusing on company value. A company’s value directly affects the company’s attractiveness to investors, lending banks and potential acquirers. The professors’ latest research report, “Pay Fairness, Firm Value, and the Role of Managerial Short-termism,” shows a positive association between employee pay fairness and a company’s long-term value.
Previous studies have investigated this link by examining the closeness of CEO pay to average worker pay as a proxy. But Asante-Appiah notes that surveys have shown that most employees don’t even know what their CEO makes, and a majority of those who do, don’t care.
The researchers used a different theory called “Efficiency Wage Theory,” which is the idea that employers who pay higher wages are more likely to retain skilled workers, increase productivity and ensure loyalty—all of which is supposed to lead to increased company value.
“Our main contribution is that we develop a measure of pay fairness that is based on equity-based justice as opposed to parity-based measures—for example, comparing employee pay to CEO pay,” Asante-Appiah explains.
“Based on our theory, we demonstrate a link between paying employees more fairly and long-term value of the firm,” Asante-Appiah adds.
Under current accounting standards, employee compensation is recorded as an expense. When companies are under pressure to meet earnings targets that increase shareholder value in the short-term, employee compensation is one of the first expenses to get slashed.
In the research literature, this is called “managerial short-termism”—sacrificing future value for short-term profits. The researchers show a negative association between paying employees more fairly and three factors related to managerial short-termism.
One is transient institutional ownership, which is when institutional investors wait for a company’s stock price to go up a little bit and then sell their holding. Another factor is industry homogeneity—it’s easy to replace one CEO with another.
Finally, the researchers show a positive association between paying employees more fairly and the CEO having a contractual protection from being fired at will, which should reduce managerial short-termism. They found that the majority of CEOs in America do not have written explicit employment contracts, which means that they can be fired at the will of the board of directors. For those who did have explicit contracts, however, they found that the CEOs paid their employees more fairly.
“But these contracts are entirely at the discretion of the board of directors, because they have been empowered by Congress, through the Sarbanes-Oxley Act, to be the ones responsible for determining the contractual relationship with the CEO,” Asante-Appiah explains.
“We’re convinced that less pay fairness in America is driven by this managerial short-termism because we found evidence based on all three measures we used to test for it,” Asante-Appiah says.
Why it Matters
The researchers acknowledge that closing the gap between employee pay and economic growth is an uphill battle. “We hope lawmakers, policymakers and other practitioners look at our research and make equitable policies out of it,” Asante-Appiah says.
Explore more Lehigh Business faculty research published in top-tier journals.