Personality can explain why some CEOs earn higher salaries

The lucrative pay for American CEOs often makes headlines. In 1965, CEO compensation was 22 times higher than the pay of an average worker. In recent years, CEOs have been paid 344 times more than the people who work for them.

The personality of a CEO is one factor driving the increase in executive compensation, according to a new study from a team of researchers that includes Sam M. Walton College of Business strategic management professor Jason Ridge.

Leaders with a Machiavellian personality, someone who is self-interested, unemotional and manipulative, earn more than $1.5 million a year in additional pay. While the CEOs benefit, often the companies also come out ahead with Machiavellian leaders.

The paper “Chief Executive Officer (CEO) Machiavellianism and Executive Pay” was published in the Journal of Applied Psychology.

Past research on executive compensation has mainly focused on the organization’s structure, such as who sits on the compensation committee or how the board operates. Little research has been done on how a CEO’s personality affects their pay.

“The scarcity of research on such traits is notable given the extensive literature on CEO pay,” the authors write.

WHAT MACHIAVELLIANISM MEANS TODAY

In the early 16^th century, the Italian diplomat and philosopher Niccolo Machiavelli wrote a political treatise called The Prince. The work made Machiavelli’s name synonymous with ruthlessness and amorality in the pursuit of a goal.

Today, psychologists use Machiavellianism, often shortened to “Mach,” as a term to describe people who are manipulative, unemotional, self-interested and see social interactions as contests to be won.

The researchers could not directly interview CEOs to determine if they had Machiavellian personalities.

“Executives are notoriously difficult to measure and do any research with. They’re busy people who are not going to fill out a survey or have time for an interview,” Ridge said.

The researchers created short video clips of CEOs, taken from speeches and media interviews. A panel of psychologists then watched the clips and scored the executives on their Machiavellian tendencies.

“There is research in psychology that suggests first impressions are particularly accurate for personalities that are more in the ‘dark triad,’” Ridge said.

The dark triad refers to non-pathological manifestations of Machiavellianism, narcissism and psychopathy.

The psychologists used a seven-point scale to measure the CEOs, who scored an average of 3.98 for Machiavellian tendencies. In other words, the executives showed higher Machiavellian personality traits than the general population but were not on the extreme end of the scale. For the study, the researchers classified any CEO with a score above 3.5 as Machiavellian. 

SHOW ME THE MONEY

The researchers found that CEOs with Machiavellian personalities earned on average $1.64 million more per year than the mean pay for CEOs in the study, which was $12.9 million.

CEOs, unlike most other employees, negotiate their compensation directly with the board of directors.

“High Mach individuals typically want to win social interactions. They’re also more likely to engage in negotiations and the types of actions that would benefit them personally,” Ridge said.

For CEOs without Machiavellian personalities, their pay goes up when their company’s stock performs well. Machiavellian CEOs, however, manage to negotiate lucrative compensation even when their companies perform poorly.

The CEOs with Machiavellian tendencies also received larger severance packages, which are paid when executives are fired without cause.

While Machiavellian CEOs can be more expensive, they might also be worth the cost. The same negotiating skills and the desire to win that helps a Machiavellian CEO secure higher pay can also serve the company.

“When they’re negotiating with stakeholders, suppliers or buyers, they’re going to be better,” Ridge said.

The researchers also found that Machiavellian CEOs negotiate higher salaries for the other top executives at their companies.

A CEO typically earns more than other top executives at a company. Therefore, driving up their pay also benefits the CEO.

At the same time, higher pay for other top executives attracts and retains talent.

“Just like with any executive trait, with Machiavellianism there’s positives and negatives,” Ridge said. “We want to focus on the positives and figure out how we can minimize the negatives in the future.”