Pay for chief executives has skyrocketed over the last two decades, and a new study found that the way executives use their wealth has a direct impact on how their companies operate. “Unfrugal” CEOs — those who spend their massive salaries on luxury goods — aren’t more likely to commit fraud in their personal business dealings. Their companies, however, are more likely to commit fraud, according to the National Bureau of Economic Research:
However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs’ reign, including the appointment of an unfrugal CFO, an increase in executives’ equity-based incentives to misreport, and a decline in measures of board monitoring intensity.
The study also found that companies run by free-spending CEOs are “significantly more likely” to make bad business decisions that lead to bankruptcy. But this shouldn’t be shocking: at some of America’s biggest companies, executive compensation is barely tied to the performance of the business.