Employees behaving badly: how high CEO pay can encourage wider wrongdoing

Research suggests that CEO stock option schemes combined with a large pay gap can encourage and motivate lower-ranking employees to commit illegal behavior.

Why did managers at German automaker Volkswagen install software to cheat on emissions tests? And why did staff at US bank Wells Fargo create millions of fraudulent savings and checking accounts without customers’ consent? A proliferation of corporate scandals in recent years prompted Stephen J. Smulowitz, Term Research Professor at the IMD Global Board Center ,and Juan Almandoz, a Professor in the Department of Managing People in Organizations at IESE business school to examine what drives people to commit wrongdoing.

Previous research had considered how pay schemes that link compensation to stock market performance, particularly in the form of option pay, can encourage a CEO to take risks that might result in wrongful behavior. Likewise, in companies with particularly large pay gaps between the CEO and the rest…