Do Boards Reward and Punish CEOs Based on Employee Satisfaction Ratings?

Abstract

We investigate whether boards of directors reward and punish chief executive officers (CEOs) based on employee satisfaction ratings. Using data from Glassdoor, we find that CEOs tend to receive larger bonuses when employee satisfaction ratings increase. Similarly, we find a higher rate of CEO dismissal when employees become less satisfied. Further, we investigate three factors that may amplify the role of employee satisfaction ratings in CEO evaluations: the importance of employees to financial performance, the board’s commitment to stakeholders, and the need to preserve firm reputation. We find some evidence that each of these three factors strengthens the relationship between employee satisfaction ratings and CEO evaluations. Finally, we exploit the staggered timing of first-time reviews on Glassdoor and use a difference-in-differences design to strengthen our inferences. Collectively, these findings suggest that boards’ evaluations of CEO compensation and retention incorporate employee satisfaction ratings.