Media coverage drives up executive pay

Influence on cash bonus as well as on salary of executives

Dutch media coverage of the remuneration received by corporate executives has had the effect of increasing both their salaries and their bonuses. What’s more, newspapers in the Netherlands pay particular attention to financial rewards handed out in larger companies, irrespective of whether or not payouts to top management are excessive, according to researcher Jordan Otten, Assistant Professor at Rotterdam School of Management, Erasmus University (RSM) in a study which took place in co-operation with the Mercer consulting firm.

Although many newspaper headlines suggest differently, most Dutch media attention is not automatically focused on big corporate earners. That much is evident from Otten’s study, “Media Attention and Executive Pay in the Netherlands,” which analyses over 2,270 journalistic articles on executive pay, published by seven Dutch national newspapers between 1998 and June 2009.

A little more than half (51 per cent) of the articles report on executive remuneration in general, without mentioning specific companies. The remaining 49 per cent cover pay packages awarded by specific companies. Otten’s research shows media attention devoted to executive pay is not systematically connected with the size and composition of pay packages taken home by executives, seen from the perspectives of the economic sector, and national and international observers. It has also become apparent that actual performance of companies does not have a systematic influence on the amount of media coverage attracted by executive remuneration in the companies concerned.

Newspapers focus most of their attention on pay packages within a limited number of companies, thereby generating lopsided coverage of the subject. For example, over the past 11½ years, the top 5 per cent of companies by size elicited 54 per cent of total media attention. And the top 10 per cent received 71 cent of the publicity. The actual size of the company and earlier media scrutiny of executive pay (or lack thereof) within that particular company play a major role in this. Larger companies attract greater media interest. And it turns out that those companies now under the magnifying glass are six times more likely to have been the focus of attention in the past. The size and composition of the pay package awarded in the past have little or no impact on this.

One possible explanation from Otten is that a bigger company attracts more press coverage in general and financial compensation is just part of the mix of subjects covered. Once a business has stepped into the limelight, it finds that journalists are more likely to cover the issue of remuneration later on.

Remarkably, the study proves that the more extensive the coverage of salaries and bonuses within a particular company, the bigger the pay package currently being enjoyed by its top management. A possible explanation could lie in the fact that newspapers do not systematically concentrate on the relative or absolute size of the rewards, so there’s no disincentive because of media attention. But conversely, the media’s focus on rewards and a greater openness surrounding the subject have resulted in better awareness among executives of how much is earned by peers outside their own company. The knowledge that they are not among the big earners can be put to good use in negotiating an improved pay package, despite publicity given to the issue.

One additional finding is the number of articles written about this subject peaks when annual reports are traditionally published. The “annual report season” explains why media attention from March to May shows a 66 per cent spike in comparison to the annual average. In addition, research demonstrates that – for all the attention that remuneration within the financial sector has been attracting over the past two years – most articles on the subject of executive pay within the whole economy were actually published in 2003.

Finally, it emerged that, until 2002, de Volkskrant, a regular daily newspaper in the Netherlands published the most articles on this subject per year. Since then, the title of ‘financial pay watchdog’ has passed to the daily financial paper Het Financieele Dagblad. During the whole period, the top three newspapers together published 68 per cent of the articles:
1. Het Financieele Dagblad (28%)
2.de Volkskrant (24%)
3. NRC (16%).

The complete article by Jordan Otten can be found here.

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For more information on RSM or this project, kindly contact Marianne Schouten, Media & Public Relations Manager for RSM, at tel: +31 10 408 2877 or email: mschouten@remove-this.rsm.nl.