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ARJ
32,2
148
Received 11 May 2016
Revised 24 November 2016
21 March 2017
28 March 2017
Accepted 29 March 2017
Accounting Research Journal
Vol. 32 No. 2, 2019
pp. 148-165
© Emerald Publishing Limited
1030-9616
DOI 10.1108/ARJ-05-2016-0056
CEO power and labor productivity
Emily Breit
Fort Hays State University, Hays, Kansas, USA
Xuehu (Jason) Song
Department of Accounting and Finance, California State University, Stanislaus,
USA and School of Accounting, Oklahoma State University, Stillwater, USA
Li Sun
University of Tulsa, Tulsa, Oklahoma, USA, and
Joseph Zhang
University of Memphis, Memphis, Tennessee, USA
Abstract
Purpose – This paper aims to examine how Chief Executive Officer (CEO) power affects firm-level labor
productivity.
Design/methodology/approach – The authors rely on regression analysis to examine the relation
between CEO power and labor productivity.
Findings – Following prior research (i.e. the sequential rank order tournament theory), the authors predict
that powerful CEOs lead to high labor productivity. They find a significant and positive relationship between
CEO power and labor productivity. They further decompose labor productivity into labor efficiency and labor
cost components and find a positive (negative) relationship between CEO power and labor efficiency (cost)
component, suggesting that more powerful CEOs better manage labor efficiency and control labor cost. The
results are also robust to various additional tests.
Originality/value – This study contributes to two streams of research: the CEO power literature in finance
and the labor productivity and cost literature in accounting. To the best of the authors’ knowledge, it is the
first study that performs a direct empirical test on the relation between CEO power and labor productivity.
Keywords Labour productivity, CEO power, Labour cost, Labour efficiency
Paper type Research paper
1. Introduction
Chief Executive Officer (CEO) power has recently received much attention. However, it is
still not clear whether having a powerful CEO is beneficial to an organization (Larcker and
Tayan, 2012). Anecdotal evidence suggests that powerful CEOs may abuse their power,
leading to negative consequences for stakeholders. For example, former CEO of Orica, Ian
Smith, used his power to carry out his aggressive and confrontational management style
that led to bad business decisions, which were largely caused by deteriorating employee
morale and labor productivity[1]. Former CEO of Merrill Lynch, John Thain, drew early
plaudits for his role in reducing costs when he took office in 2008. However, discontent
mounted when he paid big bonuses to his executives. It was reported that his behavior
caused a negative impact on employee morale and labor productivity at Merrill Lynch[2].
Much of the prior research has examined the impact of powerful CEOs on firms’
outcomes. Some studies find that CEO power is negatively related to market value and
accounting performance of a firm (Bebchuk et al., 2011), bond credit ratings (Liu and
Jiraporn, 2010) and leverage (Jiraporn et al., 2012). Other studies find that a powerful CEO
may have a positive impact on a firm’s outcomes under certain circumstances. For example, CEO power
Adams et al. (2005) suggest that powerful CEOs better implement their decisions and that and labor
this has a positive (negative) effect when the CEO makes good (bad) decisions. Despite the
surge of attention on the impact of powerful CEOs on firms’ outcomes, there is surprisingly
productivity
little evidence on how CEO power affects the labor productivity. The lack of empirical
evidence motivates us to conduct this study. In addition, understanding the relation between
CEO power and labor productivity is important because the success of a company is largely
dependent on its labor performance (Sun and Yu, 2015), and it is critical for CEOs to increase 149
labor productivity in a global setting (Mefford, 2006). The purpose of this study is to
examine the relation between CEO power and labor productivity.
We posit that having powerful CEOs has a positive impact on labor productivity for the
following reasons. First, the sequential rank order tournament theory (Lazear and Rosen, 1981;
Becker and Huselid, 1992; Knoeber and Thurman, 1994; Connelly et al., 2014) states that
employees should be constantly ranked relative to each other and promoted not for being good
at their jobs but for being better than their peers. Hence, reward structures are based on relative
rank. Under the tournament theory, an organization’s hierarchy is modeled as a multiple-stage
and winner-take-all tournament. The CEO becomes the ultimate winner. Faleye et al. (2013)
suggest that the pay difference between two successive levels reflects the potential prize on
promotion for the best relative performer at the lower level. Higher pay difference can motivate
employees at the lower levels to work harder and perform better, to win the promotion. If the
best performer at each level receives the promotion, then the CEO, the ultimate winner, is
regarded as the best performer in an organization’s hierarchy. Therefore, the sequential rank
order tournament theory suggests that higher CEO pay reflects his/her higher performance,
relative to other employees. Relying on the tournament theory, we argue that more powerful
CEOs (i.e. the best performers) may better manage the labor force to achieve maximum
productivity. Second, more powerful CEOs exercise more influence and control over corporate
operations because they are less likely to compromise with other executives. Hence, it is more
efficient for employees to carry out strategies of more powerful CEOs (Keltner et al., 2003).
Third, Wiggenhorn et al. (2016) show a positive relation between CEO power and employee
involvement, suggesting that powerful CEOs can get their employees more involved in firm
operations. Hence, we expect a positive relation between CEO power and labor productivity as
prior research (Edmans, 2011) finds that high employee involvement may lead to superior labor
performance. Finally, powerful CEOs are more likely to develop strong personal and
professional networks, which can benefit their companies by giving the companies access to
better management practices including human capital management (Larcker and Tayan, 2012)
as human capital is plausibly an important input in nearly all businesses (Edmans, 2011). The
benefit can be realized via effective sharing between managers and employees, learnings and
application of up-to-date employee management practices. Bloom et al. (2007) state that,
according to a recent survey by McKinsey, a single point increase in management practice
leads to a 25 per cent increase in labor productivity. Therefore, we expect that more powerful
CEOs adopt better labor management practices, contributing to higher labor productivity.
Following Stuebs and Sun (2010), we use the ratio of sales to the total number of
employees to capture labor productivity. Consistent with Bebchuk et al. (2011), we use CEO
Pay Slice (CPS) to capture CEO power. CEO Pay Slice (CPS) is defined as “the fraction of the
aggregate compensation of the firm’s top-five executive team captured by the CEO”. Using a
sample of 3,728 firm-year observations representing 570 unique US firms from 1994 to 2013,
we find a positive relation between CPS and labor productivity, suggesting that firms with
more powerful CEOs demonstrate higher labor productivity. We further decompose the
labor productivity ratio into labor efficiency component (proxied by the ratio of sales to
ARJ labor costs) and labor cost component (proxied as labor costs per employee). Labor
32,2 efficiency component measures the sales generated per unit of labor cost, while labor cost
component measures the average compensation cost per employee. We posit and find a
positive relation between CEO power and labor efficiency component and a negative relation
between CEO power and labor cost component, suggesting that more powerful CEOs can
generate more sales per unit of labor cost and reduce compensation cost per employee
150 simultaneously. In other words, CEOs with more power better manage both labor efficiency
and labor cost. We also perform various additional tests including changes analysis and
two-stage ordinary least squares regression analysis (2SLS), and still obtain consistent
results. Moreover, we investigate whether powerful CEOs are also better CEOs and find a
positive relation between CEO power and managerial ability, consistent with the sequential
rank order tournament theory.
This study makes several contributions. First, it contributes to two streams of research:
the CEO power literature in finance and the labor productivity and cost literature in
accounting. To the best of our knowledge, it is the first study that performs a direct
empirical test on the relation between CEO power and labor productivity. Second, this study
contributes to the debate on whether having powerful CEOs is beneficial or detrimental to
an organization (Adams et al., 2005; Bebchuk et al., 2011). Our empirical evidence suggests
that firms with more powerful CEOs demonstrate higher labor productivity. This is
consistent with our prediction, which is largely based on the sequential rank order
tournament theory. Third, this study adds to the debate on whether managers matter in
firms’ decisions and outcomes. The “upper echelons” theory (Hambrick, 2007) states that
organizational outcomes are partially influenced by managers’ differing background
characteristics. Prior studies (Bertrand and Schoar, 2003) document that managers matter in
a firm’s decisions and outcomes. Our findings suggest that powerful CEOs have an
important impact on labor productivity. Hence, this study also contributes to the
management literature. Finally, from a practical perspective, the results should interest
shareholders by showing a positive impact of having powerful CEOs on the labor
productivity. Moreover, powerful CEOs can better manage labor efficiency and cost.
The rest of this paper is organized as follows. Section 2 presents literature review and
hypotheses development. Section 3 describes the research design, and Section 4 presents the
results of the empirical tests. Section 5 presents the results of additional analyses. Section 6
concludes this study.

2. Literature review and hypotheses development

2.1 CEO power
Although CEO power has received much attention, it is still not clear whether having a
powerful CEO is beneficial to an organization (Larcker and Tayan, 2012). According to the
agency theory, agents (i.e. CEOs) are assumed to be self-interested and risk averse (Jensen
and Meckling, 1976; Eisenhardt, 1989). Jensen and Meckling (1976) state that CEOs have
considerable power over their firms’ resources because shareholders are widely dispersed,
and thus the authors suggest that CEOs often engage in self-serving actions at principals’
expenses. A CEO’s incentive to take self-serving actions (e.g. opportunistic behavior)
becomes even stronger when the CEO’s power remains unchecked (Dunn, 2004). Hence,
CEOs are more likely to engage in opportunistic behavior when they become more powerful.
Some studies suggest that powerful CEOs have a negative impact on firms’ outcomes. Liu
and Jiraporn (2010) find that bond credit ratings are lower for firms with more powerful
CEOs. Bebchuk et al. (2011) find that firms with more powerful CEOs demonstrate lower
market value (measured as Tobin’s Q), lower accounting performance, and lower stock
returns, suggesting that having powerful CEOs leads to more agency problems. Jiraporn CEO power
et al. (2012) find that more powerful CEOs use less debt financing, and the impact of changes and labor
in capital structure on firm performance is more negative for firms with more powerful
CEOs. Dikolli et al. (2016) find that firms with more powerful CEOs are less likely to use
productivity
relative performance evaluation.
In contrast, some studies suggest that having more powerful CEOs may have a
positive impact on firms’ outcomes under certain circumstances. Larcker and Tayan
(2012) suggest that “CEO power is an important leadership quality and offers many 151
potential benefits to an organization.” Keltner et al. (2003) find that more powerful
CEOs are more likely to take actions to obtain what they want. In addition, more
powerful CEOs are more likely to develop personal and professional networks, which
can benefit their firms. Adams et al. (2005) suggest that powerful CEOs are better able
to implement their decisions, which have a positive (negative) impact of their firms’
outcomes if these decisions are good (bad).

2.2 Labor productivity

Early research has examined the determinants of labor productivity. Holzer (1990) uses
a nationwide sample of firms to examine the determinants of labor productivity. The
author finds that wages, experience, current job tenure, hours spent in training, and the
gender of workers are all positively related to labor productivity. Some studies (Flippo,
1982) suggest that employee motivation also plays an important role in labor
productivity. In Flippo (1982), motivation is defined as a psychological process
involving a good directed action or behavior aimed at satisfying a particular desire.
Dyer and Reeves (1995) find that firm success is highly related to labor productivity.
Koch and McGrath (1996) find that better human resource planning, recruitment, and
selection strategies have a significant and positive impact on labor productivity. Koch
and McGrath (1996) also find that their findings are stronger for capital-intensive firms.
Delery and Shaw (2001) find that labor productivity is the key indicator of workforce
performance. Datta et al. (2005) examine the impact of industry characteristics on labor
productivity and find that labor productivity is affected by industry capital intensity,
growth and differentiation strategy.
Prior studies have also examined the impact of corporate social responsibility (CSR) on
labor productivity. Some studies (Maignan and Ferrell, 2001; Edmans, 2011) find that CSR
activities are positively related to employee commitment, leading to high labor productivity.
Using the most admired companies in the USA, Stuebs and Sun (2010) find a positive
relation between firm reputation and labor productivity. Similarly, Sanchez and Benito-
Hernandez (2015) find a positive relation between corporate social responsibility and labor
productivity in Spanish micro and small manufacturing companies. Using a list of socially
responsible firms, Sun and Yu (2015) document that socially responsible firms demonstrate
high labor productivity.

2.3 Hypotheses development

Based on the sequential rank order tournament theory, we argue that the CEO is the best
performer in an organization’s hierarchy. When a CEO becomes more powerful (CEO pay
slice becomes larger), not only the CEO’s relative performance becomes stronger but also the
ability to enhance labor productivity becomes stronger. Consequently, powerful CEOs better
manage their firm resources (including the labor force), leading to higher labor productivity.
Hence, we expect a positive relation between CEO power and labor productivity. We
propose the following hypothesis:
ARJ H1. CEO power is positively related to labor productivity.
32,2
Using the Du Pont technique (Hopper and Armstrong, 1991; Little et al., 2009), we
decompose the labor productivity into two dimensions: labor efficiency and labor cost
components. If powerful CEOs have a positive impact on labor productivity, we expect that
these CEOs are able to improve labor efficiency and reduce labor cost. In other words,
152 powerful CEOs can better use labor cost to generate sales and better identify ways to reduce
(compensation) cost per employee. Thus, we posit a positive relation between CEO power
and labor efficiency component and a negative relation between CEO power and labor cost
component. We propose the following hypotheses:

H2. CEO power is positively related to labor efficiency component.

H3. CEO power is negatively related to labor cost component.

3. Research design
3.1 Measure of CEO power
Bebchuk et al. (2011) introduce a new measure (CEO Pay Slice) to capture CEO power. CEO
Pay Slice (CPS) is defined as “the fraction of the aggregate compensation of the firm’s top-
five executive team captured by the CEO.” Bebchuk et al. (2011) argue that the CPS is a
suitable proxy for CEO power because CPS indicates the relative significance of the CEO in
terms of ability, power, or status. CPS also reflects the relative centrality of the CEO among
the top-five executives. Following Bebchuk et al. (2011), we use CPS to measure the CEO
power. Specifically, we calculate CPS as a fraction of the combined total compensation of the
top five executives. Total compensation includes salary, bonus, other annual pay, the total
value of restricted stock granted that year, the Black–Scholes value of stock options granted
that year, long-term incentive payouts, and all other total compensation (ExecuComp Item
# TDC1).

3.2 Measures of labor productivity

Consistent with Stuebs and Sun (2010) and Sanchez and Benito-Hernandez (2015), we use
labor productivity as the main variable in our study. Labor productivity is computed by
dividing total net sales by the total number of employees. The formula is as follows:

Sales ðSALE; #12Þ

Labor Productivity ðLABPROÞ ¼
Number of Employees ð EMP; #29Þ

We follow the Du Pont technique to decompose the labor productivity ratio into two components:

Labor Productivity ðLABPROÞ ¼ Labor Efficiency ðLABEFF Þ  Labor Cost ð LABCOST Þ

where:

Sales ðSALE; #12Þ

Labor Efficiency ðLABEFF Þ ¼
Total Employee Cost ð XLR; #42Þ
 Total Employee Cost ð XLR; #42Þ CEO power
Labor Cost ðLABCOST Þ ¼
Number of Employees ð EMP; #29Þ and labor
productivity
3.3 Model specification
We use the following pooled OLS model to test the influence of CEO power on labor
performance: 153
LABOR ¼ b 0 þ b 1 CPS þ b 2 AGE þ b 3 GENDER þ b 4 TENURE þ b 5 CHAIR
þ b 6 VP þ b 7 SIZE þ b 8 ROA þ b 9 LEV þ b 10 MTB þ b 11 ADV
þ b 12 LABINT þ Industry & Year Indicators þ « (1)

where in equation (1), the primary independent variable of interest (CPS) captures the CEO
power. The dependent variable (LABOR) represents each of the three labor performance
variables, namely LABPRO, LABEFF and LABCOST. All variables are defined in
Appendix.
To test H1, we analyze the coefficient b 1 on CPS when the dependent variable is
LABPRO. If a powerful CEO has a positive impact on labor productivity, we expect a
positive and significant coefficient on CPS. To test H2 (H3), we also scrutinize the coefficient
b 1 on CPS. If H2 (H3) is valid, we expect a positive (negative) and significant coefficient on
CPS when the dependent variable is LABEFF (LABCOST). Following Petersen (2009), we
use clustered standard errors regression as the main regression analysis in this study to
control for firm and time effects.
In addition to variables of interest, we control for factors associated with labor
productivity established in prior literature. Specifically, following Bebchuk et al. (2011), we
control for the age of CEO (AGE), tenure of CEO (TENURE), whether CEO chairs the board
(CHAIR), and the number of Vice Presidents among the five-top executives (VP). Moreover,
we control for the gender of CEO (GENDER) because prior studies (Ho et al., 2015) find the
gender of the CEO matters in firm performance. The above control variables are also used in
other relevant studies. For example, Liu and Jiraporn (2010) control for the age of CEO and
whether the CEO also chairs the board. Following Stuebs and Sun (2010), we control for firm
size (SIZE), firm performance (ROA), leverage ratio (LEV), and market to book ratio (MTB).
Furthermore, we control for firm advertising expenditures (ADV) because firms spending
more advertising expenses may attract better employees – an effect of firm reputation on
labor productivity (Stuebs and Sun, 2010). Labor productivity may vary depending on labor
intensity across industries (Sun and Yu, 2015). For example, labor productivity (e.g. sales
per employee) may be lower in labor-intensive industries (e.g. restaurants), and higher in
high-tech industries. Hence, we control for labor intensity (LABINT). We winsorize the
variables at the level 1 per cent and 99 per cent and include year- and industry-dummies (by
2-digit SIC industry classification) in the regression analysis.

3.4 Sample selection and descriptive statistics

We begin the sample selection process by downloading the CEO data including the top five
executives’ compensation (ExecuComp item TDC1), CEO age, CEO gender, CEO tenure,
whether CEO chairs the board, number of vice presidents among the top-five executives,
shares owned by CEO, and options held by CEO from ExecuComp. Next, we use Compustat
to obtain financial statement data and then merge the above two datasets. A large number of
ARJ observations are lost because few companies report their total labor costs (XLR, #42) in
32,2 Compustat. The final sample with completed data consists of 3,728 firm-year observations
from 1994 to 2013.
Panel A of Table I presents descriptive statistics for the sample firms. The mean and
median values of labor productivity (LABPRO) are 0.320 and 0.248, respectively. The
mean (median) value of labor efficiency component (LABEFF) is 5.040 (3.873), while
154 the mean (median) value of labor cost component (LABCOST) is 0.072 (0.059). The mean
(median) value of CPS is 0.362 (0.360). The average age of CEO is approximately 57 years
old. On average, a company has three vice presidents on the board. Most companies are
profitable with the mean (median) value of ROA is 0.035 (0.021).
Panel B of Table I reports the distribution of firm-year observations by year for the
sample firms. For example, there are 209 firm-year observations in 1994 and 200
observations in 2013. Panel C of Table I reports the distribution of firm-year observations by
industry (using two-digit SIC industry classification) for the sample firms. For example,
there are 56 firm-year observations in oil and gas extraction industries and 88 observations
in chemical industries.
Table II provides the correlation matrices for selected variables for the sample firms. For
each pair of variables, the Pearson correlation coefficient and related p-value are provided.
Table II reports a significant and positive relation between CPS and LABPRO, suggesting
that firms with more powerful CEOs demonstrate higher labor productivity. In addition,
Table II shows a significantly positive relation between CPS and LABEFF, and a
significantly negative relation between CPS and LABCOST, suggesting that more powerful
CEOs better manage labor efficiency and control labor cost. In conclusion, the results
provide initial evidence supporting our hypotheses.

4. Main results
Table III reports the clustered standard errors regression results of equation (1) testing our
hypotheses. The coefficient on CPS is 0.063 with the p-value less than 1 per cent in the
regression model where the dependent variable is LABPRO. The positive and significant
coefficient supports H1 that powerful CEOs leads to higher labor productivity.
When LABEFF and LABCOST are the dependent variables, the coefficients on CPS are
1.200 (p-value = 0.002) and 0.006 (p-value = 0.032), respectively, suggesting that powerful
CEOs can not only increase their labor efficiency but also reduce their labor costs. Thus,
H2 and H3 are supported[3].
For the control variables, labor productivity (LABPRO) is significantly and positively
associated with firm size (SIZE) and leverage ratio (LEV), but negatively associated with
CEO tenure (TENURE), market-to-book ratio (MTB), advertising expenditures (ADV) and
labor intensity (LABINT). These findings are consistent with general expectations (Sun and
Yu, 2015). For example, the significant and negative relation between LABPRO and
LABINT suggests that machine-intensive firms are more labor-productive than those in
labor-intensive firms.

5. Additional tests
5.1 Changes analysis
To mitigate the omitted variables concerns, we use a changes analysis to provide additional
evidence that differences in labor performance can be attributed to the variation of CEO
power. Specifically, we conduct a bivariate changes analysis by regressing changes in labor
productivity (DLABPRO) from year t-1 to year t on the corresponding changes in CEO
power (DCPS) from year t-1 to year t. We also regress changes in labor efficiency component
Variable Observation Mean SD 25P Median 75P
CEO power
and labor
Panel A: Descriptive statistics
LABPRO 3,728 0.320 0.284 0.162 0.248 0.366 productivity
LABEFF 3,728 5.040 4.868 2.898 3.873 5.411
LABCOST 3,728 0.072 0.054 0.044 0.059 0.081
CPS 3,728 0.362 0.112 0.300 0.360 0.430
AGE 3,728 57.483 9.604 51.000 58.000 64.000
GENDER 3,728 0.855 0.151 1.000 1.000 1.000
TENURE 3,728 7.957 6.910 3.000 6.000 11.000 155
CHAIR 3,728 0.673 0.469 0.000 1.000 1.000
VP 3,728 3.002 1.191 2.000 3.000 4.000
SIZE 3,728 8.616 1.767 7.280 8.580 9.816
ROA 3,728 0.035 0.051 0.010 0.021 0.060
LEV 3,728 0.170 0.162 0.045 0.128 0.258
MTB 3,728 2.416 2.391 1.289 1.950 2.963
ADV 3,728 0.009 0.015 0.000 0.000 0.012
LABINT 3,728 0.278 0.136 0.185 0.258 0.345

Panel B: Sample distribution by year

Year Observation % of sample Year Observation % of sample
1994 209 5.61 2004 169 4.53
1995 199 5.34 2005 184 4.94
1996 181 4.86 2006 199 5.34
1997 161 4.32 2007 197 5.28
1998 159 4.27 2008 185 4.96
1999 165 4.43 2009 226 6.06
2000 157 4.21 2010 223 5.98
2001 145 3.89 2011 216 5.79
2002 166 4.45 2012 213 5.71
2003 174 4.67 2013 200 5.36

Panel C: Sample distribution by industry

Two-digit Industry description Observation % of 2-digit Industry description Observation % of
SIC Sample SIC sample
12 Coal Mining 9 0.24 49 Electric Gas 107 2.87
13 Oil and Gas 56 1.50 50 Durable Goods 10 0.27
16 Heavy Construction 13 0.35 51 Nondurable Goods 15 0.40
20 Food 58 1.56 53 Merchandise 1 0.03
22 Textile 5 0.13 54 Food Stores 5 0.13
24 Lumber 14 0.38 56 Apparel Stores 1 0.03
26 Paper 30 0.80 58 Eating and 230 6.17
Drinking
27 Printing 70 1.88 59 Miscellaneous 13 0.35
Retail
28 Chemicals 88 2.36 60 Depository 1,264 33.91
Institutions
29 Petroleum 14 0.38 61 Nondepository 106 2.84
Institutions
30 Rubber 16 0.43 62 Brokers 274 7.35
33 Primary Metal 32 0.86 63 Insurance Carriers 80 2.15
35 Machinery 23 0.62 64 Insurance Agents 62 1.66
36 Electronic 22 0.59 65 Real Estate 4 0.11
37 Transportation 50 1.34 67 Other Investment 19 0.51
38 Measuring 48 1.29 72 Personal Services 13 0.35
40 Railroad 90 2.41 73 Business Services 158 4.24
41 Local/Suburban 16 0.43 75 Auto Repair Services 8 0.21
Transit
42 Motor Freight 164 4.40 78 Motion Pictures 3 0.08
45 Transportation By Air 189 5.07 80 Health Services 190 5.10
47 Transportation Services 48 1.29 82 Educational Services 7 0.19
48 Communications 66 1.77 87 Management 37 0.99
Table I.
Descriptive statistics
Note: Refer to Appendix for variable definitions of sample firms
 32,2
ARJ

156

Table II.
Correlation matrices
LABPRO LABEFF LABCOST CPS AGE GENDER TENURE CHAIR VP SIZE ROA LEV MTB ADV

LABEFF 0.553
p-value < 0.0001
LABCOST 0.623 0.085
p-value < 0.0001 < 0.0001
CPS 0.074 0.012 0.109
p-value < 0.0001 0.004 < 0.0001
AGE 0.072 0.002 0.131 0.078
p-value < 0.0001 0.898 < 0.0001 < 0.0001
GENDER 0.035 0.036 0.019 0.006 0.095
p-value 0.032 0.030 0.252 0.710 < 0.0001
TENURE 0.039 0.000 0.041 0.079 0.494 0.036
p-value 0.017 0.996 0.011 < 0.0001 < 0.0001 0.029
CHAIR 0.016 0.025 0.007 0.080 0.072 0.123 0.274
p-value 0.338 0.130 0.691 < 0.0001 < 0.0001 < 0.0001 < 0.0001
VP 0.000 0.020 0.020 0.002 0.035 0.009 0.083 0.104
p-value 0.987 0.233 0.233 0.905 0.033 0.593 < 0.0001 < 0.0001
SIZE 0.271 0.078 0.231 0.002 0.093 0.107 0.082 0.204 0.081
p-value < 0.0001 < 0.0001 < 0.0001 0.901 < 0.0001 < 0.0001 < 0.0001 < 0.0001 < 0.0001
ROA 0.019 0.012 0.084 0.032 0.019 0.052 0.039 0.015 0.083 0.261
p-value 0.240 0.446 < 0.0001 0.054 0.254 0.001 0.018 0.373 < 0.0001 < 0.0001
LEV 0.046 0.042 0.062 0.038 0.116 0.001 0.110 0.061 0.088 0.107 0.068
p-value 0.005 0.010 0.000 0.019 < 0.0001 0.950 < 0.0001 0.000 < 0.0001 < 0.0001 < 0.0001
MTB 0.045 0.016 0.059 0.046 0.027 0.010 0.009 0.031 0.056 0.108 0.434 0.038
p-value 0.006 0.342 0.000 0.005 0.104 0.550 0.601 0.058 0.001 < 0.0001 < 0.0001 0.022
ADV 0.108 0.059 0.101 0.025 0.030 0.040 0.052 0.074 0.010 0.052 0.119 0.001 0.200
p-value < 0.0001 0.000 < 0.0001 0.135 0.063 0.014 0.001 < 0.0001 0.537 0.001 < 0.0001 0.943 < 0.0001
LABINT 0.457 0.608 0.176 0.046 0.063 0.029 0.043 0.030 0.017 0.250 0.037 0.065 0.037 0.081
p-value < 0.0001 < 0.0001 < 0.0001 0.005 0.000 0.075 0.018 0.065 0.306 < 0.0001 0.025 < 0.0001 0.025 < 0.0001

Note: Refer to Appendix for variable definitions

 Dependent variable = LABPRO Dependent variable = LABEFF Dependent variable = LABCOST
Parameter Estimate t Value Pr > |t| Estimate t Value Pr > |t| Estimate t Value Pr > |t|

Intercept 1.386*** 6.22 < 0.0001 5.476*** 12.87 < 0.0001 0.201*** 5.06 < 0.0001
CPS 0.063*** 2.94 0.003 1.200*** 3.17 0.002 0.006** 2.14 0.032
AGE 0.000 0.88 0.378 0.004 0.44 0.660 0.000 0.56 0.574
GENDER 0.005 0.39 0.696 0.653*** 2.99 0.003 0.003 1.13 0.257
TENURE 0.003*** 5.32 < 0.0001 0.008 0.96 0.336 0.005*** 4.10 < 0.0001
CHAIR 0.001 0.14 0.887 0.059 0.43 0.669 0.004 1.32 0.187
VP 0.002 0.80 0.425 0.093** 1.99 0.047 0.002*** 4.63 < 0.0001
SIZE 0.013*** 4.62 < 0.0001 0.134** 2.11 0.035 0.006*** 7.06 < 0.0001
ROA 0.035 0.39 0.698 3.987** 2.27 0.023 0.014 0.82 0.411
LEV 0.073** 2.15 0.032 0.251 0.76 0.448 0.009 1.32 0.189
MTB 0.007*** 4.28 < 0.0001 0.104*** 2.67 0.008 0.001*** 3.36 0.001
ADV 2.737*** 11.03 < 0.0001 4.052*** 6.10 < 0.0001 0.520*** 9.40 < 0.0001
LABINT 1.117*** 7.05 < 0.0001 2.670*** 8.30 < 0.0001 0.068*** 10.28 < 0.0001
YEAR YES YES YES
INDUSTRY YES YES YES
Adj. R2 0.507 0.400 0.636
Obs. 3,728 3,728 3,728

Notes: ***p < 0.01, **p < 0.05, *p < 0.10; Refer to Appendix for variable definitions. Standard errors clustered by firm. Model: LABPRO (LABEFF, LABCOST) =
f (CPS; Control Variables)

main regression
Table III.
and labor

analyses
CEO power

CEO Power and

157

labor performance
productivity
ARJ (DLABEFF) and labor cost component (DLABCOST) from year t-1 to year t on the
32,2 corresponding annual changes in CEO power (DCPS). Table IV presents the results of this
changes analysis of the relation between DCPS and DLABPRO (DLABEFF, DLABCOST).
We find that the changes in CEO power (DCPS) is positively (0.037) and significantly with
the p-value less than 5 per cent related to changes in labor productivity (DLABPRO).
Moreover, Table IV reports a significantly (p-value = 0.021) positive (coefficient estimate =
158 0.222) relation between DCPS and DLABEFF and a significantly (p-value = 0.011) negative
(coefficient estimate = 0.008) relation between DCPS and DLABCOST. These results
suggest that an increase in CEO power can also lead to an increase in labor productivity and
efficiency and at the same time a decrease in labor costs, consistent with the primary results.

5.2 Additional controls and alternative dependent variables

It is possible that other factors may affect CEO power and labor productivity. Hall (2016)
examines the relation between investor monitoring and empire building by analyzing the
effect of institutional ownership on the management of labor costs and finds that public
ownership induces financial reporting pressure, while also alleviate regulatory pressure
through greater ability to sell equity. Other studies (Chung et al., 2002; Chen et al., 2012)
suggest that institutional ownership may enhance a firm’s internal control and governance
mechanism. We argue that CEOs may behave differently when the institutional ownership
is relatively high. For example, institutional monitoring may limit CEO power, which may
influence labor productivity. Thus, we include institutional ownership (LOGIO) as an
additional control variable. Specifically, we use the institutional ownership data from TFN-
13f Institutional Holdings in our regression tests.
Faleye et al. (2013) suggest that CEO’s incentive affects labor productivity. Thus, we also
control for CEO incentive alignment to account for the potential effects of top management
incentives. Following the literature (Faleye et al., 2013), we define the CEO’s incentive
alignment as the change in the CEO’s firm-specific wealth for a $100 change in shareholder
wealth, calculated as: CEO Alignment (ALIGN) = (Shares owned þ option delta  options
held)/shares outstanding)  100.
Column 1 of Table V reports the clustered standard errors regression results of
equation (1) with additional controls (LOGIO and ALIGN). In Column (1), the coefficient on
CPS is 0.060 with the p-value less than 1 per cent in the regression model where the
dependent variable is LABPRO. The positive and significant coefficient again supports H1
that powerful CEOs leads to higher labor productivity, even in presence of strong external
monitoring and strong CEO incentive alignment.
Some prior studies (Stuebs and Sun, 2010) use net income to measure labor productivity and
the efficiency component. We also use the alternative measures of labor productivity and
efficiency component. Table V Column 2 shows that the coefficient on CPS is 0.035 with the
p-value less than 5 per cent in the regression model where the dependent variable is
LABPRO2 (measured as income before extraordinary items divided by total number of
employees). This finding is consistent with that in Table III Column 1. When we use an
alternative measure of labor efficiency component (LABEFF2), as income before
extraordinary items divided by total labor costs, we still obtain the consistent statistical
inference (results un-tabulated for brevity) as shown in Table III Column 2. Hence, our
results still hold when we use these alternative labor productivity variables.
Our main analyses rely on the sequential rank order tournament theory, which assumes
that CEOs are the best managers. For completeness, we investigate whether powerful CEOs
are better managers. We use the managerial ability index scores in Demerjian et al. (2012) as
a proxy for managerial ability, including CEO ability. Table V Column 3 shows that the
 Dependent variable = DLABPRO Dependent variable = DLABEFF Dependent variable = DLABCOST
Parameter Estimate t Value Pr > |t| Estimate t Value Pr > |t| Estimate t Value Pr > |t|

Intercept 0.013 0.57 0.568 0.110 1.17 0.241 0.000 0.03 0.975
DCPS 0.037** 2.17 0.030 0.222** 2.31 0.021 0.008** 2.55 0.011
DAGE 0.001 0.76 0.448 0.022 1.03 0.302 0.000 0.84 0.402
DGENDER 0.015 0.94 0.346 0.009 0.05 0.959 0.000 0.02 0.986
DTENURE 0.001 0.58 0.562 0.012 0.87 0.383 0.000 0.10 0.924
DCHAIR 0.006 1.21 0.225 0.015 0.25 0.805 0.000 0.52 0.606
DVP 0.004** 2.32 0.021 0.022 0.80 0.422 0.001** 2.23 0.026
DSIZE 0.042*** 2.92 0.004 0.120* 1.93 0.054 0.011*** 2.89 0.004
DROA 0.102* 1.90 0.058 0.398** 2.44 0.015 0.026*** 2.80 0.005
DLEV 0.009 0.38 0.704 0.256 0.96 0.339 0.003 0.77 0.443
DMTB 0.001 0.82 0.412 0.006 0.35 0.727 0.000 0.33 0.742
DADV 0.126 0.54 0.587 0.592 0.29 0.774 0.069* 1.67 0.095
DLABINT 0.593*** 6.41 < 0.0001 0.701*** 5.38 < 0.0001 0.107*** 3.86 0.000

YEAR YES YES YES

INDUSTRY YES YES YES
Adj. R2 0.165 0.158 0.096
Obs. 2,898 2,898 2,898

Notes: ***p < 0.01, **p < 0.05, *p < 0.10. Refer to Appendix for variable definitions. Standard errors clustered by firm. Model: DLABPRO (DLABEFF;
DLABCOST) = f (DCPS; DControl Variables)

Table IV.
and labor

changes analyses
CEO power

CEO Power and

159

labor performance
productivity
ARJ Dependent variable = LABPRO Dependent variable = LABPRO2 Dependent variable = MA
32,2 Parameter Estimate t Value Estimate t Value Estimate t Value

Intercept 1.301*** 4.50 0.032*** 6.34 0.010*** 4.27

CPS 0.060*** 2.92 0.035** 2.27 0.019** 2.10
AGE 0.001 0.85 0.009 0.72 0.008 0.99
GENDER 0.005 0.36 0.073* 1.68 0.015 0.95
160 TENURE 0.003* 1.91 0.015 0.77 0.008 1.00
CHAIR 0.002 0.34 0.037 1.08 0.051* 1.73
VP 0.004 1.52 0.049 1.36 0.032* 1.88
SIZE 0.019*** 4.00 0.010** 2.42 0.058*** 2.94
ROA 0.034 0.67 0.286*** 2.93 0.099*** 4.21
LEV 0.071** 2.04 0.100* 1.71 0.015 0.46
MTB 0.008*** 2.91 0.006 0.64 0.014 0.90
ADV 2.115*** 8.74 0.099* 1.75 0.433** 2.15
LABINT 0.995** 2.51 0.055 1.54 0.072* 1.73
LOGIO 0.087* 1.87 0.066** 2.31 0.074** 1.96
ALIGN 0.046*** 3.05 0.035*** 3.29 0.050** 2.41
YEAR YES YES YES
Table V. INDUSTRY YES YES YES
2
CEO power and labor Adj. R 0.511 0.225 0.303
Obs. 3,669 3,669 3,669
performance
additional regression Notes: ***p < 0.01, **p < 0.05, *p < 0.10. Refer to Appendix for variable definitions. Standard errors
analyses clustered by firm. Model: LABPRO (LABEFF, LABCOST) = f (CPS; Control Variables)

coefficient on CPS is 0.019 with the p-value less than 5 per cent in the regression model
where the dependent variable is the managerial ability score (MA). The findings suggest
that more powerful CEOs are also better CEOs, consistent with the tournament theory.

5.3 Two-stage least squares regression analysis

Following Jiraporn et al. (2014), we perform a two-stage least squares regression (2SLS)
analysis which controls for possible reverse causality. Two-stage regression analysis
requires identifying an instrumental variable (IV) which is highly correlated to a firm’s CEO
power but does not influence labor productivity except through CEO power. Following
Bebchuk et al. (2011) and Jiraporn et al. (2014), we use the industry median CEO power
performance (CPS_median) of the firms in the same industry (by two-digit SIC code). In the
first stage of 2SLS, we estimate CEO power (CPS) using the median CPS score of the firms in
the same industry. In the second stage of 2SLS, we use the instrumented values of CPS from
the first stage and include them as independent variables in the second stage regression.
Table VI reports the 2SLS results for testing these hypotheses. The first stage regression
reports the average CEO power (CPS_median) is positively related (1.175) to individual CEO
power at the significant level with p-value less than 1 per cent. The second stage reports the
coefficient of the instrumented CPS is positive (0.062) and highly significant (p-value =
0.021) in the regression model where the dependent variable is LABPRO, suggesting that
more powerful CEOs lead to higher labor productivity (i.e. H1 is supported). When LABEFF
and LABCOST are the dependent variables, the coefficients on instrumented CPS are 1.180
(p-value = 0.000) and 0.006 (p-value = 0.016), respectively. Thus, our H2 and H3 are again
supported. In summary, the two-stage regression analysis (2SLS) lends support to the main
results, suggesting that our conclusion is unlikely vulnerable to endogeneity.
 CPS_instrumented LABPRO LABEFF LABCOST
CEO power
Parameter Stage 1 Stage 2 Stage 2 Stage 2 and labor
productivity
Intercept 0.019 1.386*** 1.148*** 0.201***
p-value 0.730 < 0.0001 < 0.0001 < 0.0001
CPS_median 1.175***
p-value < 0.0001
CPS_instrumented 0.062** 1.180*** 0.006** 161
p-value 0.021 0.000 0.016
AGE 0.001*** 0.000 0.004 0.000
p-value < 0.0001 0.409 0.647 0.562
GENDER 0.020 0.005 0.653* 0.003
p-value 0.107 0.793 0.070 0.463
TENURE 0.001*** 0.003*** 0.008 0.000***
p-value < 0.0001 < 0.0001 0.341 < 0.0001
CHAIR 0.020*** 0.001 0.059 0.002
p-value < 0.0001 0.882 0.635 0.178
VP 0.001 0.002 0.093** 0.002***
p-value 0.560 0.367 0.040 < 0.0001
SIZE 0.002 0.013*** 0.134*** 0.004***
p-value 0.245 < 0.0001 0.001 < 0.0001
ROA 0.125*** 0.035 3.988*** 0.014
p-value 0.004 0.624 0.001 0.275
LEV 0.022* 0.073*** 0.251 0.009**
p-value 0.089 0.001 0.502 0.021
MTB 0.002*** 0.007*** 0.104*** 0.001***
p-value 0.005 < 0.0001 < 0.0001 0.000
ADV 0.188 2.737*** 2.205*** 0.528***
p-value 0.219 < 0.0001 < 0.0001 < 0.0001
LABINT 0.011 1.117*** 2.267*** 0.068***
p-value 0.534 < 0.0001 < 0.0001 < 0.0001
YEAR YES YES YES YES
INDUSTRY YES YES YES YES
Adj. R2 0.105 0.500 0.388 0.639 Table VI.
Obs. 3,728 3,728 3,728 3,728 CEO Power and labor
Notes: ***p < 0.01, **p < 0.05, *p < 0.10; Refer to Appendix for variable definitions. Stage 1: performance two-
CPS_instrumented = f (CPS_median; Control Variables); Stage 2: LABPRO (LABEFF; LABCOST) = f stage least squares
(CPS_instrumented; Control Variables) regression

6. Conclusion
We join the debate on whether having powerful CEOs is beneficial or detrimental to an
organization (Adams et al., 2005; Bebchuk et al., 2011) by examining the relation between
CEO power and labor productivity. We find a positive relation between CEO power and
labor productivity, suggesting that firms with more powerful CEOs demonstrate higher
labor productivity. When we decompose labor productivity into labor efficiency component
and labor cost component, we find a positive (negative) relation between CEO power and
labor efficiency (cost), suggesting that CEO with more power better manage labor efficiency
and control labor cost. We perform various additional tests and obtain consistent results.
Overall, our study concludes that powerful CEOs have a positive impact on labor
performance. We also find that powerful CEOs are better managers, consistent with the
sequential rank order tournament theory.
ARJ Nevertheless, this study has several limitations. First, our results suggest that powerful
32,2 CEOs tend to reduce labor costs. Cutting labor costs may justify powerful CEO’s high salary.
This is a possible explanation for the negative relation between CEO power and labor costs.
However, reducing labor costs (i.e. staff reduction) may have negative consequences for firm
performance over the longer term. For example, short-term cost savings (i.e. cutting labor costs)
may cause financial and reputational damages to a firm. On the other hand, higher labor costs
162 may help firms better engage with more-able employees, leading to greater increases in future
sales revenue. Similarly, excessive CEO power may lead to dysfunctional consequences of labor
productivity. For instance, firms may experience short-term improvements of labor
productivity. However, such improvements may not be sustainable, eventually hurting the
firm’s long-term performance and causing high turnover. Second, although using CEO Pay
Slice (CPS) to measure the power of CEOs has its merit, high CPS may also indicate possible
CEO entrenchment rather than CEO power or ability. A high level of excess CPS can be viewed
as a reflection of significant governance problems (Bebchuk et al., 2011). Prior studies (Core
et al., 1999; Cronqvist et al., 2009) suggest that entrenched CEOs receive higher compensation
and they often have a negative impact on their firms (i.e. lower level of productivity). Also, once
a CEO becomes an entrenched CEO, it will be very difficult for the board to replace him/her.
Taken together, as Cronqvist et al. (2009) point out, our results may become weaker when a
CEO becomes entrenched. In other words, the positive relation between CEO power and labor
productivity may diminish when the CEO becomes too powerful (i.e. CEO entrenchment).
Third, it is difficult to measure CEO power because it is multi-dimensional. CPS is an
approximate measure of CEO power. More-precise measures of CEO power may yield stronger
results. Next, due to the limited data availability of labor cost variable in Compustat, our
sample size is relatively small. Finally, Adams et al. (2005) point out that many studies on CEO
power assume that CEOs who become more powerful are very good at maximizing firm value.
Similarly, we assume that powerful CEOs make optimal decisions on improving labor
performance and the implementation process of such decisions from powerful CEOs is efficient.
Thus, readers need to exercise caution when generalizing the conclusions. The above issues can
be investigated in future research.

Notes
1. www.smh.com.au/business/we-were-wrong-to-keep-ian-smith-orica-chair-russell-caplan-
20150322-1m59il.html
2. www.nytimes.com/2015/10/22/business/. . ./the-rise-and-fall-and-rise-of-john-thain.html
3. We also perform firm fixed effects regression and still obtain consistent results.

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Appendix CEO power
and labor
productivity
Variable Description

LABPRO Labor productivity, as total sales (SALE, #12) divided by total number of employees (EMP,
#29)
LABPRO2 An alternative measure of labor productivity, as income before extraordinary items (IB, #18)
165
divided by total number of employees (EMP, #29)
LABEFF Labor efficiency component, as total sales (SALE, #12) divided by total labor costs (XLR,
#42)
LABEFF2 An alternative measure of labor efficiency component, as income before extraordinary items
(IB, #18) divided by total labor costs (XLR, #42)
LABCOST Employee cost component, as total labor costs (XLR, #42) divided by total number of
employees (EMP, #29)
CPS The fraction of the aggregate compensation of the firm’s top-five executive team captured by
the CEO
AGE The age of CEO
GENDER Gender of CEO, 1 if a company’s CEO is male, and 0 otherwise
TENURE Tenure of CEO in years
CHAIR An indicator variable that takes a value of 1 if the CEO chairs the board, and 0 otherwise
VP The number of Vice Presidents among the top-five executives
SIZE Firm size, as the natural log of total assets (AT, #6)
ROA Return on assets, as income before extraordinary items (IB, #18) scaled by total assets (AT,
#6)
LEV Leverage, as long-term liabilities (DLTT, #9) divided by total assets (AT, #6)
MTB Market-to-book ratio, as market value of common shares (CSHO, #25)  (PRCC_F, #24)
divided by total book value of common shares (CEQ, #60)
ADV Advertising intensity, as advertising expenses (XAD, #45) scaled by total sales (SALE, #12)
LABINT Labor intensity, following Palacios (2013), we use macroeconomic data to estimate the labor
intensity of different industries
LOGIO Institutional ownership, as the log of one plus the percent of institutional owners as reported
by Thompson Financial’s CDA/Spectrum database in the end of fiscal year
MA Managerial ability score in Demerjian et al. (2012)
ALIGN CEO alignment is the change in the CEO’s firm-specific wealth for each $100 change in the
firm’s market value; calculated as (Shares owned þ option delta  options held)/shares Table AI.
outstanding)  100, following Core and Guay (2002) and Faleye et al. (2013) Variable definitions

Corresponding author
Li Sun can be contacted at: lis560@utulsa.edu

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