National Consumers League

Safety recalls effected by executive compensation

sg.jpgThank you to Gretchen Morgenson, writing in this Sunday’s The New York Times, about the connection between outsized executive pay packages and the incidence of safety recalls. 

Morgenson is a hero in the consumer community for her exposés on illegal corporate practices. She describes findings of a University of Notre Dame study that takes a look at companies that rely heavily on stock options in their executive compensation packages and the disinclination to recall a product with safety. What the study, titled “Throwing Caution to the Wind: The Effect of CEO Stock Option Pay on the Incidence of Product Safety Problems,” found that was surprising to me is that “CEO option pay is associated with both a higher likelihood of experiencing a recall as well as a higher number of recalls.”

The researchers studied two industries both regulated by the FDA: food companies and pharmaceutical companies. Other notable findings from the study are:

“Product recalls were less common among companies whose chief executive founded the companies or had long tenure there. The study’s authors speculate that such executives may be more risk-averse because they are generally large shareholders and their personal reputations are intertwined with the company.”

The lessons from this study that boards who are hiring and designing pay and benefits for CEOs should take away is that they need to align the interests of not just shareholders, but also consumers when considering heavy use of stock options in these pay packages.