Based on research by David De Angelis and Yavin Grinstein

• Executive pay tends to reflect specific firm characteristics and needs.
• But an important portion of an executive’s paycheck falls within the discretion of company boards.
• The basis of that discretionary pay is still a puzzle.

In the best of worlds, executive pay and performance should be in sync. That's not just the opinion of shareholders and boards: Former UK Prime Minister Theresa May has prioritized reforms to avoid out-of-control executive pay, and and economist Thomas Piketty has long blamed executive raises for widening income inequality.

So how should a company’s board decide if they pay their top brass too much? The question is of special interest to the Securities and Exchange Commission, which in December 2006 required more complete disclosure of the way firms tie executive pay to performance. The SEC was concerned that rules governing compensation packages had not kept pace with the marketplace, so mandated greater transparency about the guidelines used to determine CEO rewards, performance targets and the time frame during which performance is judged.

The new reporting requirements allowed Rice Business professor David De Angelis and Yaniv Grinstein of Cornell University to undertake a vast study of executive pay patterns. First they culled data on CEO compensation contracts from the proxy statements of more than 490 public U.S. firms in the S&P 500 index. Then they reviewed each statement's section on CEO compensation.

What they found reflected an array of priorities that directly affect the value of America’s most successful corporations.

Ninety percent of the firms in the study granted some type of performance-based award, payouts contingent on a company reaching a specific performance level. While the statements showed that the vast majority of the performance measures were accounting-based, some 13 percent were market-based, and 8 percent were based on non-financial measures such as diversity and customer satisfaction.

De Angelis and Grinstein analyzed CEO packages across economic sectors, finding large variations in the incentives for executives in different types of businesses. Energy-related companies, for instance, tied roughly 43 percent of their compensation to market measures. Firms in the durable and shops sectors, however, based only 7 percent and 5 percent of their compensation, respectively, on market measures.

That compensation indicators tend to be similar within given sectors of the economy suggests that executive compensation reflects firm characteristics. Managers in high-growth firms, for example, tend to focus on actions aimed at long-term growth. For these firms, stock-price performance measures and sales-growth performance measures are likely to be used. CEOs in larger, more complex enterprises tend to be judged to a greater extent on market performance.

There’s a certain complexity, to be sure, in executive compensation arrangements. Firms typically spread out their performance terms of compensation to include both accounting and market-based targets.

But overall, De Angelis and Grinstein’s findings indicate that the structure of performance-based awards doesn’t come out of the blue. Instead, it’s consistent with economic rationales.

Not all CEO compensation, though, is in the form of performance-based awards. Firms also grant discretionary awards, ones that can be paid in cash or equity. These discretionary awards, the researchers found, tended to show no significant link to past, present or future performance. Why is this? The result is somewhat puzzling, De Angelis and Grinstein say, and merits further research.

The general public, in other words, is not alone in wondering how executives’ total pay correlates to the value they bring their firms. While there are advances in understanding the design of performance-based awards, discretionary pay remains a puzzle. That even academic researchers can't yet explain it should only increase public questions about how these pay models work, as well as scholars' resolve to study them further.

David De Angelis is an assistant professor of finance at Jones Graduate School of Business at Rice University.

To learn more, please see: De Angelis, D. & Grinstein, Y. (2015). Performance terms in CEO compensation contracts. Review of Finance, 19(2), 619-651.

By David Tobin 

This article by David Tobin, a former Senior Lecturer in Communication at Rice Business, was originally published as part of the curriculum in his class, Leadership Communication.  

In the business world, the problem with empathy is that too many people don’t understand what it really means and how big a factor it is in successful communication.

Houston Chronicle business columnist Chris Tomlinson sums it up well: “Surveys show that many managers consider empathy a sign of weakness or femininity, not the kind of thing macho businessmen embrace.” Quite simply, these managers are wrong. “Researchers who study leadership and corporate culture are turning up more and more evidence that empathic leaders build better teams, negotiate better deals and produce happier clients” (26 July 2015).

New York Times columnist David Brooks, who was the Rice University commencement speaker in 2011, makes the same point when he describes the rise of the “relational economy.” Computers are doing more and more of the cognitive tasks that used to be accomplished by lawyers and financial analysts–but they fail dismally compared to humans when it comes to handling a position of authority or accountability, or being part of a team. “Empathy becomes a more important workplace skill: the ability to sense what another human being is feeling or thinking” (4 Sept. 2015).

Here’s Tomlinson again: “Empathy is not mollycoddling, and it’s not a synonym for sympathy. It’s not solving someone’s problems for them or feeling pity...Empathy is an advanced communication skill that requires...understand[ing] the other person’s perspective by identifying his or her problems, needs, feelings, thoughts and values.”

Sound familiar? In Leadership Communication, we call it audience analysis. You know the mantra: “Business communication is goal-oriented and receiver-focused.” The best business communicators try very hard to know what their receivers are thinking, feeling, and worrying about. This knowledge (which, again, is not the same thing as sympathy) shapes how they communicate.

The last word on empathy I’ll leave to a Houston physician, internist, hospitalist, and essayist, Dr. Ricardo Nuila spoke at a Rice TEDx event about the importance of paying attention to patients’ stories. Inevitably, empathy came up: “Teaching doctors to empathize,” he said, “is modern medicine’s Higgs boson [the elusive “God particle” of subatomic physics] – how do we keep our doctors competent and simultaneously empathetic? . . . This is the essence of empathy: using your brain to extend yourself into someone else’s story” (14 February 2015).

The problem with empathy is the assumption that it’s mostly about flexing your emotional muscles–but it’s not. It’s about using your brain.

By Jennifer Latson

The Boy Who Loved Too Much, by Jennifer Latson, an editor for Rice Business Wisdom, was published today by Simon & Schuster. 

How Nice Is Too Nice?

Eli D'Angelo has Williams syndrome, a rare genetic disorder sometimes called the opposite of autism: people who have it tend to be extremely outgoing, unconditionally loving and indiscriminately trusting. Journalist Jennifer Latson spent three years following the lives of Eli and his single mother, Gayle, to tell this narrative nonfiction story about what Williams can reveal about the genetic basis of behavior and the quirks of human nature.

In this excerpt, Gayle and Eli stop at a motel during a summer road trip, where Gayle tries to thwart Eli's attempts to befriend everyone he sees.

It was nearly midnight, and Eli was dozing, when Gayle finally found a motel with a vacancy: a low white-brick building near an oil refinery in Clearfield, Pennsylvania. But as soon as she pulled into the parking lot, she was tempted to turn around and keep driving. The warm air drifting through her open window carried the acrid smell of diesel fuel on a cloud of cigarette smoke. The parking lot was filled with work trucks around which men stood in groups dimly lit by streetlights. Tractor-trailers lined the edges of the parking lot, bordering the motel like a menacing metal hedgerow.

Gayle considered getting back on the highway. If she drove all night, they could be home by morning. But she knew she was too tired. They were stuck here at the Clearfield Budget Inn.

Eli woke up when the car rolled to a stop. He surveyed the landscape enthusiastically, oblivious to the seediness of the place.

“I’ve never been here in a long time!” he exclaimed, clapping his hands together.

Gayle stepped out of the car and into the July heat, and opened the back door to let him out. She could feel the eyes of the men on her, the only woman in their midst, and on Eli, who was now rocking back and forth on his heels with excitement. Both Gayle and Eli were rumpled from hours in the car. Gayle, a youthful forty-one-year-old, wore a purple camisole and capri-length cargo pants that revealed some of her tattoos. On her back, feathery wings spread outward from her spine. Her left shin was covered with a series of colorful images: on the back, a dragonfly; on the left, flaming dice; on the right, a serpent coiled around a sword; and on the front, a red heart with a banner that said “Eli.”

Her long black hair, usually wavy, had gone limp in the muggy heat. She had pulled it up into a clip, revealing the discs that had stretched dime-size holes in her earlobes.

Eli wore a black T-shirt and the baggy denim shorts that Gayle had bought at Kohl’s just before the road trip, hoping these wouldn’t split at the seams like his last pair. She described her son as “husky,” but it was his pear shape that made him hard to shop for. Boys’ clothes weren’t designed with this shape in mind.

She ran a protective hand through Eli’s dark curls. His features were those of a much younger child: chubby cheeks, an upturned nose, and a smile so wide it made his eyes crinkle. They were crinkling now. His face was bright with joy, and he tugged at Gayle’s arm, pulling her toward the light, the trucks, the men. She jerked him forcefully in the other direction.

In the sweltering front office, the motel’s owner, an Indian man with thinning white hair, slid open a thick glass window—Bulletproof, Gayle thought. He looked as tired as Gayle felt. She rummaged through her purse to find her wallet and handed him her credit card. Eli, meanwhile, bounced up from behind her, smiling broadly.

“I’m Eli! What’s your name?” he said, extending a hand to the motel owner. The counter was higher than Eli’s head, but he stood on his tiptoes and strained to reach. The man gave him a quizzical look. Without answering, he reached through the window and shook Eli’s hand.

Turning to Gayle, the motel owner nodded toward the parking lot. “Don’t worry about those guys,” he said. “They’re here for the summer, working construction. They just like to relax out there after work.”

Only slightly reassured, Gayle took the room key.

“He likes me,” Eli declared as they left the office, pointing his thumb toward his own chest.

“I’m sure he does,” Gayle agreed blankly. She was already scanning the row of doors for the number on her key. She slung Eli’s backpack over her shoulder, rolling her suitcase across the uneven pavement with one hand and holding Eli’s hand with the other.

Eli peered at the faces of the men in the parking lot, hopeful that someone would return his gaze, but they looked away when he caught their eyes. One man lit a cigarette; another stubbed one out on the pavement. One man mumbled something too quietly for Gayle to hear. The others laughed.

Apart from the rest of the group, one man sat alone on the sidewalk, his elbows propped on bent knees, his head drooping heavily in his hands. His eyes were closed. Gayle noticed his sinewy arms, his muddy work boots. Maybe he was just tired from a long day, but Gayle’s instincts told her he was more likely drunk or high. She looked for a way around him, but he was on the walkway just in front of her room. There was no other way to go.

She whispered to Eli through clenched teeth, “Do. Not. Say. Anything. To. Him.”

“Why?” Eli replied in an ordinary voice. They were ten feet from the man, and closing in.

Gayle raised a finger to her lips. “Because. He’s sleeping.”

Eli’s eyes never left the stranger. When they were less than an arm’s length from the man, Eli shouted, “Are you sleeping?”

Excerpt from THE BOY WHO LOVED TOO MUCH by Jennifer Latson

Copyright © 2017 by Jennifer Latson. Reprinted by permission of Simon & Schuster, Inc, NY.

Based on research Alexander Butler, Gustavo Grullon, James P. Weston and Jess Cornaggia

• Most companies tend to underperform after they raise capital.
• Some scholars argue that the composition of equity compared to debt determines whether stock prices fall after an infusion of capital.
• But recent research shows that net financing matters more than the composition of financing.

You could call it the opposite of dieting: When corporations get a hearty helping of funding, their stock prices often drop. But until three professors at the business school compared the roles of net financing and financing composition, scholars were unclear on why. What the Rice researchers found could influence managers' choices in how to fund their firms.

Companies usually raise money in two ways. In equity financing, an investor writes a check in exchange for a certain amount of control and input on major decisions. The investor gets part ownership of the company and a portion of profits. Alternatively, companies can simply take out a loan.

While a loan doesn't require ceding control to investors, it's not without risk. Too much debt stifles growth. It can also spook potential investors, who may find a firm too risky, leading to cash flow problems. As a result, most companies prefer to split the difference, taking on a mix of financing that includes both debt and equity.

Until recently, some scholars have argued that it’s the particular mixture of these two funding sources that determines if stock prices fall after a capital infusion. Then Alexander W. Butler, Gustavo Grullon and James P. Weston, professors at the business school, along with their colleague Jess Cornaggia, now at Georgetown University, examined the role of financing composition on a company’s future performance. Their discovery: The quantity — not the qualities — of a financing plan matters most in future stock returns.

Before Butler, Grullon, Weston and Cornaggia's study, scholars explained the stock price phenomenon in two different ways. One idea, called market timing theory, proposes that managers issue securities as a way to exploit overpricing. Market timing theory suggests that when managers think equity is overvalued, they issue more equity and borrow less. Naturally, according to this belief, lower stock prices follow, since managers issued the securities at a time when stocks were overpriced.

An alternative theory argues that market prices respond efficiently to the risks involved in raising external capital. Returns are low after a security issuance because managers are converting growth options into real assets or responding to changes in the cost of capital.

Looking at data from companies over a 38 year period, Butler, Grullon, Weston and Cornaggia came to a very different conclusion. Ample evidence shows that when considered separately, both the composition and the level of net financing can affect capital flows. For example, some studies do find that firms tend to underperform after raising equity capital. When the sources of capital were mixed together, though, investment composition did not matter as much as investment levels in determining future stock prices.

If managers can successfully time the market through their financing decisions, then their choice of debt or equity should predict future stock returns. Since firms that raise a large amount of capital can be expected to underperform for a variety of reasons, underperforming after an infusion of external capital is not necessarily evidence of poor market timing. The more telling test: whether the composition of capital, raised or distributed, affects future returns. The Rice team found that it does not.

Although firms tend to raise capital when stock market prices are high and seem to reflect better investment opportunities, the research suggests managers shouldn't try to toggle between debt and equity in an effort to strengthen future returns. Ultimately, it's calories in that makes the difference: regardless of composition, the quantity of money raised is the key in a company’s performance.

Alexander W. Butler a professor of finance

Gustavo Grullon is a Jesse H. Jones Professor of Finance

James P. Weston is the Harmon Whittington Professor of Finance at the Jones Graduate School of Business at Rice University

To learn more, please see: Butler, A. W., Cornaggia, J., Grullon, G., & Weston, J. P. (2011). Corporate financing decisions, managerial market timing and real investment. Journal of Financial Economics, 101(3), 666–683.

Based on research by Frederick Oswald

• Companies are often right to assume that a worker with more of a certain appealing trait will perform better.
• But new research suggests that the personality/performance link might not always be straightforward.
• Some employee qualities that are generally appealing, such as conscientiousness, can be less than useful in large doses.

Let’s say you’re a CEO and need a manager. Human Resources has narrowed your choices to two candidates. Both look equally qualified, except for one detail. The first candidate ranks slightly above average in conscientiousness: a good thing. The second candidate is extremely conscientious. A great thing, right?

Not always.

Traditional research assumes a linear relationship between personality traits and performance. In other words: More of a good thing is better.

But a growing body of data-driven research suggests that, at least in some work settings, the link between personality and performance may not be a straight line. In these cases, certain characteristics may be useful only up to a point. After that point, the value-add may taper off. And in some cases, the traits can stunt performance.

Take conscientiousness. A not-so-conscientious worker likely will do sloppy or erratic work, whether in manufacturing, health care, sales or virtually any other endeavor. Too much conscientiousness, though, can be worse. A super conscientious worker, many managers know, can be plagued by perfectionism, inflexibility or paralysis.

So when might too much of a good thing turn bad?

A recent paper coauthored by Frederick Oswald, a professor of psychology and management at Rice, addresses one piece of this puzzle. Oswald and his team conducted computer simulations to see what might happen when companies assume a simple more-is-better relationship between good traits and good performance. Their results suggested there can be a cost when this assumption goes wrong.

Oswald also led experiments in the U.S. Navy that reached a similar finding. When subjects performed more than one task on a computer monitor in normal conditions, exceptional conscientiousness levels had little effect on the outcome. But when the tasks were speeded up in an “emergency,” conscientiousness had a negative effect. Paying too much attention to detail on one task, the data suggested, undermined performance on other tasks.

Relationships like these may vary across jobs, personality measures and performance criteria. For an individual business, ferreting out when the personality/performance connection goes nonlinear requires broad, field-specific research on large samples. That’s why most companies still hire on the assumption that more of a good thing is better.

In general, this approach does work. But in the near future, cutting edge research and big data business insights together may reveal more complex yet stable relationships between personality and employee outcomes. For employees, this could raise performance, satisfaction and engagement. For firms, it could boost effectiveness.

Until then, as so often, old-time wisdom still has a place in business. Moderation in all things. Well, almost all. It really is possible, as Oswald shows, to hire too much of a good thing.

Frederick Oswald is a professor of psychology and management at Rice University.

To learn more, please see: Converse, P. D., & Oswald, F. L. (2014). Thinking ahead: Assuming linear versus nonlinear personality-criterion relationships in personnel selection. Human Performance, 27, 61-79.

Also please see: Oswald, F. L., Hambrick, D. Z., Jones, L. A., & Ghumman, S. (2007). SYRUS: Understanding and predicting multitasking performance (NPRST-TN-07-5). Millington, TN: Navy Personnel Research, Studies and Technology.

Based on research by Haiyang Li and Yan Anthea Zhang

• Internationalization often results in decreased product innovation, particularly in emerging market firms.
• As manufacturing firms expand internationally, divided resources and attention lead to less ingenuity.
• Markets with high import penetration suffer less from innovation loss as they expand globally, because they become accustomed to international business practices at home.

For centuries, raw materials and technology flowed along the Silk Road between China and the West. Ideas, including Islam and Buddhism, math and medicine, traveled as well. And as global trade spread, innovation did too.

The same trends continue today. Or at least they do most of the time. According to Haiyang Li and Yan Anthea Zhang, management professors at Rice Business, international expansion in some cases actually dampens product innovation. It's not globalization that’s the problem, Li and Zhang say, but the splitting of a company’s resources between domestic and overseas markets, especially in emerging market firms.

Previous scholars, they argue, assumed that when such a company split resources, its share in the domestic market remained constant. But they found to the contrary: As a firm increases its international market share, its domestic market share decreases. And when the company’s domestic market dwindles, so too do the opportunities to search for novel ideas for that market.

To test their ideas, Li, Zhang and coauthor Jie Wu of the University of Macau looked at China, an emerging market whose firms tend to pursue aggressive internationalization to gain world-class technology and capability. Because China’s domestic market is growing rapidly at the same time, however, these companies can’t disregard it.

Li, Zhang and Wu studied 883 manufacturing firms in China. Analyzing data from the World Bank and Chinese National Bureau of Statistics, the scholars examined manufacturing firms from Beijing, Chengdu, Guangzhou, Shanghai and Tianjin. What they found is that firms that divided resources between domestic and international markets often were less innovative.

Because these companies serve both domestic and overseas markets, managers often ran short on time or resources to create novel ideas, and ended up imitating their peers. It’s a particularly thorny problem for emerging market firms, whose leaders are less likely to have global management experience. Aesop aside, necessity seems to squelch invention.

The more widely the Chinese firms expanded geographically, in fact, the less they innovated. There was just one scenario in which the Chinese firms’ innovation boomed along with global expansion: when businesses faced high import penetration on their home turf.

Companies that had to deal with such penetration, the researchers discovered, had seen diverse paths to doing business already in their own market. So they were better prepared to go international than companies in more provincial marketplaces. In other words, the Silk Road had already come to them.

Throughout history, world travel has been a path to new ideas — and prompted new ideas in the travelers themselves. Zhang, Li and Wu offer a provocative insight about the limits of this kind of movement. If a company doesn’t have the capacity to take advantage of its new horizons, its power to invent actually shrinks.

The best way for companies to build that capacity? Paradoxically, embrace the foreign presence at home.

Haiyang Li is a professor of strategic management

Yan Anthea Zhang is the Fayez Sarofim Vanguard Professor of Management in Strategic Management at the Jones Graduate School of Business at Rice University

To learn more, please see: Li, H., Zhang, Y. A., and Wu, J. (2012). The role of internationalization in the product innovation of emerging market firms. Academy of Management Annual Meeting Proceedings. (2012) p.1.

Based on research by K. Ramesh, Tiago Duarte-Silva, Huijing Fu and Christopher F. Noe

Key findings:

• Earnings report delays generally lead to drops in stock prices.
• Disclosure can soften this market reaction.
• Managers can sway the market response by sharing information about the cause of a delay.

Investors eagerly wait for the news in their earnings reports. When these reports don’t appear on the expected date, investors worry — and stock prices often fall as a result. But what if managers could present late reports in a way that spared their companies?

Research by K. Ramesh, a professor at Rice Business, shows that managers’ approach to late earnings reports can profoundly affect market reaction. When firms put off filing a report, it’s up to managers to decide whether to speak up or stay quiet. Those who choose to talk about a postponement then must decide how, what and how much to say.

All earnings delays, whether they’re attended by a statement or not, prompt negative market reaction, prior research suggests. But in his research, Ramesh, Herbert S. Autrey Professor of Accounting, wanted to learn more about the exact consequences of these late reports, and how managers can lessen the blowback.

To do this, Ramesh and a team of coauthors first looked at the incidence, timing and contents of a comprehensive sample of press releases announcing an earnings delay. Then they studied what those delays did to market value.

Conventional wisdom in the business press already suggested that investors viewed any announcement of a delayed earnings report as bad news. But finance theorists tell a more complicated story, one in which the market response might be partially shaped by managerial behavior. Subtle factors, they found, such as whether the impending delay is discussed or treated with silence, really can make a difference.

In the view of some theorists, merely announcing a delay can sometimes avert a drop in stock prices. Others argue that this isn’t necessarily the case, especially if the company discloses that the delay stemmed from legal concerns. The better approach: making it clear up front that reports aren't being postponed to hide disastrous information. But what if the information is indeed disastrous?

That may be the one case where disclosure won’t change much, Ramesh and his team found.

“Those companies that are in fact concealing disastrous results will experience no benefits (in the form of higher stock price) from revealing their true situation,” the research team wrote, “because the market will infer the worst from the manager’s decision not to announce the delay.” For this reason, they added, delayed earnings without a stated explanation prompt the most negative market reaction. As in so many areas of public relations, without a narrative, investors will infer a negative one of their own.

To better understand the impact of late reports, Ramesh and his coauthors built a comprehensive sample of 545 delay announcements by using a keyword search of the Dow Jones Factiva database between January 1, 1995, and December 31, 2009.

As conventional wisdom suggested, the study showed that announcements of late earnings reports led to negative market reactions. (Earlier studies have shown smaller firms are hit hardest by this dynamic, perhaps because investors assume large companies have more finely tuned financial reporting systems, so are less worried by their earnings delays).

Consistent with the anecdotal evidence, the average one-day abnormal stock return for the sample was -6.29 percent, while the median return was -2.27 percent. Both figures are economically and statistically significant.

The researchers next classified the announcements according to stated reason, dividing the delays into “Accounting” and “Non-Accounting” categories. “Accounting” explanations were subdivided into “Accounting Issue,” “Accounting Process” and “Rule Change.”

Meanwhile, “Non-Accounting” explanations were divided into “Business,” which linked the delay to some event such as divestitures or regulatory proceedings, and “Other,” which ranged from earthquakes to power outages. Finally, there were delays for no stated reason at all.

About two-thirds of the late announcements, the team found, were linked to accounting. When firms named a specific accounting issue as the cause for delay, the average abnormal return reached a statistically significant -8.15 percent. When managers explained that the accounting process was not complete, the average abnormal return was slightly lower, at -7.04 percent.

After accounting issues, business events drove most earnings delays. In theory, these events could have been either good or bad news. But the average abnormal return for the subsample was a statistically significant -3.74 percent — a reflection of the fact that most business events linked to late earnings reports tend to be negative.

Curiously, the average abnormal return for the grouping classified as “Other” was almost nil — at 0.53 percent. This suggests that the market does not penalize managers for events outside of their control that have little, if any, relevance to firm performance.

“No Reason,” the researchers found, was the most damaging explanation of all. Seven percent of the sample, or 37 out of 545 delays, came without a stated reason. The average abnormal return for these was a significant -10.41 percent, a greater negative number than the returns for any of the other reasons.

So what should managers do when a deadline is going to be busted? Bite the bullet and disclose the reasons, Ramesh suggests. For one thing, it helps limit legal exposure and preserve credibility. When the reason for the late report is innocuous, explaining to investors can also mitigate the market’s displeasure. A caveat: While informing investors that a power outage caused earnings delay will calm jitters, disclosure may not make a difference if the company just can’t balance its books.

It’s human nature, apparently, to read no news as bad news. Relaying something — anything — about the cause of a late report seems to soothe investors’ nerves by preventing them from filling the silence themselves.

Duarte-Silva, T., Fu, H., Noe, C., & Ramesh, K. (2013). “How do investors interpret announcements of earnings delays?” Journal of Applied Corporate Finance 25(1): 64-71.

Based on research by Yan Anthea Zhang, Robert E. Hoskisson (George R. Brown Emeritus Professor of Management) and Wei Shi 

• CEOs pursue acquisitions more aggressively after a close competitor wins a major award.
• CEOs launch acquisitions to recoup prestige and social acclaim – often to the detriment of shareholders.
• Acquisitions made by CEOs in the period after losing out on a major award generate lower returns than those made before executive awards are announced.

Everyone likes a prize. From gold stars for obedient children to national awards bestowed on business titans, research shows that positive reinforcement works. But what happens to those who don’t win?

A recent study by business school professor Yan Anthea Zhang and emeritus professor Robert E. Hoskisson, along with former Rice Business doctoral student and current professor at Indiana University, Wei Shi, concluded that awards competitions can actually harm companies when the CEO doesn’t win. And chances to lose are abundant: Media outlets such as Businessweek, Harvard Business Review and Forbes are just a few of the publications that run CEO competitions.

While the winners instantly earn celebrity status, the researchers found that the almost-winners yearn for what they did not get and chase public acclaim by making more and larger acquisitions. The effect on non-winning CEOs is even more pronounced if the competition is close.

To explain how this happens, the authors turn to social psychology. Behavioral influences, they argue, can lead to poor strategic decision-making. Social comparison theory, meanwhile, posits that humans instinctively judge our status relative to others with whom we identify. That’s not always bad. When individuals compare themselves to superior others, known as upward comparison, it can fuel the wish to improve.

But when the individuals are corporate leaders—by definition achievement-oriented and status-driven—the comparing can get out of hand. These leaders notice when someone else in their group wins acclaim.

So what is an overlooked CEO to do? The most straightforward option is to redirect resources to improving company performance. Financial results, after all, are at the heart of CEO competitions. But this approach takes time. Acquisitions, on the other hand, draw an instant spotlight. The bigger the firm, the greater the crowd of stakeholders—and more attention for the dealmaker. Acquisitions, in other words, are a fast track for a CEO who’s lost a competition and wants to save face.

The rise in acquisitions from a pre-award period to a post-award period shows the competitions’ effect. They were 8.2 percent higher than the rise in acquisitions for control groups. (The control groups were acquiring companies in industries that overlapped those of firms with competitor CEOs who didn’t win awards, but didn’t overlap those of firms whose CEOs were award winners). The value of those acquisitions after the awards period increased too: They were 70.9 percent higher than that seen among control firms.

That’s not to say the acquisitions were good choices. The scholars compared the value of firms in the days before, during and after an acquisition was announced, and on average, companies that lost an award saw a drop in the value of acquisitions they made after the competition period, compared to the value of acquisitions they made in the pre-award period.

What’s more, if the rivalry was really intense—especially if the CEOs knew each other—the negative effects of these acquisition decisions were worse.

To test this dynamic, the three professors used S&P 500 companies in ExecuComp, which supplies pay and demographic data on top managers, for the years 1996 through 2010. The sample group excluded firms headquartered outside the U.S. and only considered awards given out by major U.S. publications. After winner CEOs were identified, the researchers identified their close competitors: CEOs leading companies of a similar size and with a similar product portfolio. In most cases, they looked at acquisitions made during the periods four years before an award was given, and compared that to the four years after.

Board members, managers and shareholders may all want to take note. Spotting the negative effects of awards is crucial, since as in so much of life losers far outnumber the winners.

Nor are all awards are created equally. Failing to win the prestigious award from Businessweek (the magazine with the highest circulation) had a particularly triggering effect, prompting more CEOs’ acquisition activity than other awards.

While that’s little more than human nature in action, shareholders naturally expect a bit more than that to guide firm decisions. A simple question might help. Faced with a CEO proposing an acquisition, perhaps the board should ask first, “When was the last time you didn’t win an award?”

Yan Anthea Zhang is the Fayez Sarofim Vanguard Professor of Management in Strategic Management

Robert E. Hoskisson is the George R. Brown Emeritus Professor of Management at Jones Graduate School of Business at Rice University

To learn more, see: Shi, W., Zhang, Y. A., & Hoskisson, R. E. (2017). Ripple effects of CEO awards: Investigating the acquisition activities of superstar CEOs’ competitors. Strategic Management Journal, 38(10), 2080-2102.

Based on research Jefferson Duarte, Stephan Siegel and Lance Young

View the cartoon based on this article here: Lie Detector

• Trustworthiness is a huge factor in financial transactions.
• The appearance of trustworthiness influences lenders’ behavior: Lenders are more likely to fully fund loans and give better interest rates to borrowers they perceive as trustworthy.
• Appearance-based judgments of trustworthiness are usually accurate. Borrowers who look more trustworthy really are more likely to repay loans.

Don’t judge a book by its cover, goes the saying. After all, beauty is only skin deep. And appearances can be deceiving. But according to research led by Rice Business professor Jefferson Duarte and coauthors Stephan Siegel and Lance Young, in some financial transactions, where there's smoke there's actually fire. In peer-to-peer lending, the researchers found, borrowers who look more trustworthy to lenders—based on photos alone—have better loan success. Not only that: They have higher credit scores and lower default rates.

Psychologists have understood for some time that people form impressions based on appearance, and that for better or worse those impressions affect social outcomes. Taller men are often perceived to be more adept leaders, for example. Conversely, recent Rice research shows that overweight men are treated less well in retail environments than men who weigh less. Economics and finance researchers, meanwhile, have focused on how perceived attractiveness relates to both pay and assumptions of competence.

Duarte’s research is unique, however, because it focuses on how appearance-based judgments affect perceptions of trustworthiness—and whether those perceptions in turn shape lending decisions.

The research team was interested in appearance-based judgments of trustworthiness because trust is so pivotal in financial transactions. To find out how appearance guided financial decisions, they decided to analyze data from a peer-to-peer lending site. On the site, a potential borrower posts a request for a three-year unsecured fixed rate loan. Her request, called a listing, includes the amount she wants to borrow and the top interest rate she is willing to pay. The site then conducts online auctions in which individual lenders bid on the potential borrower’s request. If enough lenders submit bids, the listing becomes a funded loan.

Because borrowers could upload photographs with their applications, Duarte and his team were able to analyze the role of appearance in this process. Their sample consisted of 5,950 loans, including 3,291 with photographs. First, the team asked 25 people to rate potential borrowers based on photographs alone. To determine the appearance of trust, they asked the raters to rank the trustworthiness of the person in the foreground of each photo on a scale of 1 to 5.

Interestingly, there was no consistency in the images that the potential borrowers posted of themselves. The photos include pictures of the borrowers in uniform, posing with their pets and drinking beer with friends.

Next, the researchers asked raters, "Assuming they have the money to pay you back, what are the chances that they would, in fact, pay you back?” For each question and photograph the team averaged the responses to get a consensus of a borrower's perceived trustworthiness and perceived willingness to pay.

Perhaps unsurprisingly, a “trustworthy” appearance clearly swayed lenders' decisions. Candidates with an aura of trustworthiness were more successful at getting a fully funded loan and better interest rates. In fact, borrowers in the top fifth quintile of perceived trustworthiness were offered interest rates 50 basis points lower than borrowers who appeared less trustworthy.

Far more surprising: Borrowers who looked trustworthy also turned out to have better credit grades and a lower probability of loan default. Appearance of trustworthiness, in short, accurately matched the borrowers' character.

The team theorized several explanations for these findings. Though appearance is often a misleading predictor of actual personality traits, it can accurately predict certain behaviors, such as risk taking and aggression.

Perhaps a person’s appearance, some subtle mix of grooming, facial expression and musculature, eventually comes to reflect his or her reputation. Perhaps a trustworthy appearance and trustworthiness itself both have a common biological origin.

The implications are profound for lenders, aspiring borrowers—and future researchers, including ethicists. Is it possible, for example, to identify the specific components that make someone look "trustworthy"?  Which of these is voluntary, such as color of clothing, natural versus synthetic fibers, orthodontia and authentic-looking smiles? And which are the result of life experience, nutrition, even genetics, such as smoker’s teeth, a wide-open smile or elusive gaze? What precisely is the interaction between appearance, treatment by others and behavior?

In short, when it comes to lending, you really can judge a book by its cover. But volumes remain unknown about how and why.

Jefferson Duarte is a Gerald D. Hines Associate Professor of Real Estate Finance at Jones Graduate School of Business at Rice University.

To learn more, please see: Duarte, J., Siegel, S., & Young, L. (2012). Trust and credit: The role of appearance in peer-to-peer lending. Review of Financial Studies, 25, 2455-2484.

Based on research Scott Sonenshein

• Businesses are more proactive than ever about issues like diversity, discrimination and the environment. To understand what they’re advocating — and why — we should start by studying their workers.
• A wide range of employees now use work as a vehicle to advance social causes.
• When they’re in the workplace, activists often describe their causes in economic terms.

Once only whispered about at the water cooler, the cause of equal rights for the LGBT community has become a shout loud enough to be heard in the executive suite.

The rise in volume is striking. Ten years ago, many mainstream workplaces ignored or actively dismissed the experiences of gay workers. Compare that to 2016, when North Carolina proposed a bill that many saw as biased, and firms including Dow Chemical, Hewlett Packard and PepsiCo used their financial clout to fight it. State-sanctioned discrimination against the LGBT community, they argued, would drive the nation’s most talented job candidates from North Carolina.

Did the CEOs come out swinging against prejudice simply because they felt it was the right thing to do? Probably not. Instead, their own employees increasingly made their values known, and swayed their leaders to act. What’s less clear is how they did it. While corporate leaders can direct company resources to promote and protect their causes, employees must be more resourceful to get their point across.

Scott Sonenshein, a management professor at Rice Business, examined some of their strategies in a recent study of language and power in the workplace. Rather than meekly adopting the views of their managers, Sonenshein found, employees consciously harness specific tools to change executives’ understanding of issues — while still preserving the firm’s core values.

Their main tool: “selling” their causes by framing them in work-friendly terms.

Sonenshein’s model lets researchers track an idea to see how its language and meaning shift as employees tailor it to resonate with decision-makers. Take the example of a human resources manager who passionately believes her company should recruit a diverse workforce because it would redress past discrimination. By the time she presents her idea to superiors, the HR chief likely will offer a different argument: that hiring a diverse staff will create access to a broader range of customers and potentially boost sales.

By “embellishing” some aspects of the issue and “subtracting” others, the manager has reframed — or, as Sonenshein puts it, “crafted” — the issue to gain better traction. In fact, even when an individual strongly believes a cause simply is “the right thing to do,” he or she still uses economic embellishment to push the idea through the ranks, Sonenshein found.

Sonenshein’s model also shows how power affects the crafting process. When an individual worker engages in issue-crafting, Sonenshein found, it’s usually in response to explicit company values.  So in a company that prizes the bottom line above all else, workplace activists make a point to give justifications that support the company’s economic goals.

This effort is especially pronounced when advocates attempt to sell their idea upward in the ranks. Conversely, the crafting effort drops relative to the employee’s clout at work. In other words, the more power workers have in an organization, the smaller the discrepancy between what they believe about an issue and how they talk about it in public.

There’s plenty more research to be done, Sonenshein notes, especially about how crafting social issues at work affects individuals and the organizations themselves. What Sonenshein’s model offers is a framework for pursuing those questions — and insight into the way individual choices, language and status are shaping the firms that are reshaping society.

Scott Sonenshein is the Henry Gardiner Symonds Professor of Management at Jones Graduate School of Business at Rice University. He is the author of “Stretch: Unlock the Power of Less — and Achieve More Than You Ever Imagined.”

To learn more, please see: Sonenshein, S. (2006). Crafting social issues at work. Academy of Management Journal, 49(6), 1158-1172.