When the Marketing Chief's Pay Package Misses the Mark
CMO pay tracks the productivity of the role. When the contract strays from what the role predicts, performance suffers.
Chief marketing officers steward enormous budgets, yet almost no research had examined how they are paid or whether it matters. Viewed through the lens of agency theory, pay, and especially performance-based pay, should track the marginal productivity of the role.
Across 9,230 firm-year observations from 1992 to 2013, that is what the data show. CMOs at firms with high advertising and R&D intensity, and in competitive product markets, command larger total compensation, and a greater share of it is market based and sensitive to the firm's stock price.
The sharper result concerns deviations. When a CMO's compensation drifts from the level the firm's characteristics predict, performance deteriorates: a 10 percent deviation in market-based pay is associated with return on assets lower by 0.28 percent, dampened earnings surprises, and annualized stock returns about 2.4 percent lower.
The study received the Mabry Award for best paper in the KU School of Business. Its practical message is that incentive design in the C-suite extends well beyond the CEO and CFO.
The Takeaway
It is not just whether the marketing chief gets incentive pay. It is whether the whole package matches the role, because deviations from the predicted contract are costly.