A few decades ago, the role of an HR manager was fairly mundane. They were responsible for tasks such as managing payroll, ensuring compliance with labor laws, and organizing the office holiday party.
Today, the role of chief human resources officer (CHRO) at large firms has become much more critical. These leaders have moved into the C-suite, often have the ear of the CEO, and are involved in major decisions about issues such as high-level strategy, mergers and acquisitions, and hiring and firing senior executives.
They “have a lot of power within the organization,” says Edward Watts, an assistant professor of accounting at Yale SOM.
When Watts and his colleagues gained access to a trove of data on CHRO compensation from Equilar, a leading provider of executive compensation intelligence, they wondered what those numbers could tell them about a firm’s prospects. The CHRO compensation level is one way of capturing how much the company prioritized effective management of its employees. “Does strategic human capital management seem to lead to better outcomes?” Watts asks.
His new study, with David Larcker of Stanford University, Charles McClure of the University of Chicago, and Shawn Shi of the University of Washington, suggests that “the answer is yes,” he says. Firms that paid their CHROs relatively high wages appeared to more actively hire innovative, productive workers with better credentials and drop ineffective ones. Company culture also thrived, yielding better employee ratings in areas such as values and work-life balance.
The team concluded that it would be helpful for investors to know the CHRO’s compensation as part of firm disclosures, so they can price that information into the company’s expected value. “This is telling us something really important,” Watts says. “It’s a fairly useful predictor of outcomes within firms.”
The rise of the CHRO can be traced to the increasing emphasis placed on firms’ employees, also known as human capital, and the ideas they generate. Many large companies aren’t focused on running factories or creating physical products anymore; they’re producing knowledge, patents, and other types of intangible assets. In this service-based economy, the humans who work at the company are “at the forefront of creating value,” Watts says.
As a result, HR departments have ballooned and are given far bigger budgets than they used to receive. When you think “HR” now, it’s not about cupcakes for employee birthday parties, he says. Instead, it’s about running programs to manage tens of thousands of employees, including strategies to recruit and retain talent. “That’s a very big job,” he says. “There are tremendous resources they’re in charge of.”
To find out whether allocating more resources to human capital management paid off, Watts and his co-authors began by estimating the prevalence of CHROs by examining firm profiles from Revelio Labs. They found that the number of leaders with the title Chief Human Resources Officer, or something similar such as Chief People Officer, more than doubled from 2014 to 2023.
The team then analyzed data on CHRO compensation from firm disclosure statements, as well as from executive surveys of about 1,400 companies. While CHRO pay varied tremendously, the median was about 20% of the CEO’s compensation, averaging around $3 million.
The team then used that measure—the CHRO-to-CEO pay ratio—as an indicator of how well-paid the CHRO was. They found that companies with higher CHRO pay ratios tended to have more turnover. While turnover has negative connotations, some amount is desirable to shed underperforming employees and bring in better ones, Watts says: “You wouldn’t want to work at a firm where someone who didn’t do anything got paid the exact same amount as you.”
Further digging suggested that the turnover likely wasn’t driven by employees feeling miserable at their jobs and quitting. At companies with higher-paid CHROs, the people who left tended to take lower salaries at their next jobs, suggesting that they were lower performers. And new workers who joined were more likely to come from competing firms and to hold degrees from higher-ranked universities. Turnover was also concentrated in areas that were critical to generating revenue, such as engineering.
Firms with high-paid CHROs appeared to engage in “very strategic targeting of the right employees,” Watts says. These companies were more likely to hire people who had more patents, and those innovative workers continued to produce patents at a higher rate after joining the firm.
Employees also seemed happier at these companies. On average, firms with high CHRO pay had better Glassdoor ratings for compensation, benefits, career opportunities, culture, values, and work-life balance. While the researchers don’t know exactly what programs or processes the CHROs implemented to bring about these changes, “we can observe the outcomes,” Watts says.
Crucially, the differences in turnover, worker quality, and employee ratings came about only when the CHRO was higher paid. Simply having a CHRO didn’t make a difference. “We find virtually no effect for lower-paid CHROs,” Watts says.
The team can’t say conclusively whether the lofty CHRO pay is worth it, Watts says. The high wages are a stand-in for the priority the firm places on its workers and the resources it’s willing to allocate toward them. Hiring a high-paid CHRO also tends to coincide with other changes at the company, such as major strategic shifts.
Still, CHRO pay could be a useful proxy to judge how well a firm will perform in the future. And “investors seem to be agreeing with us,” Watts notes. When companies hired well-compensated CHROs, the team observed a bump in the firm’s stock price.
Many companies don’t disclose their CHRO’s compensation; it’s not required unless that person is one of the five highest-paid employees. Making these numbers public would be “very informative,” he says. When pay is higher, the improvements in human capital management “eventually map into more knowledge capital and better firm value.”
“The Yale School of Management is the graduate business school of Yale University, a private research university in New Haven, Connecticut.”
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