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Could Executive Compensation Impact Product Recalls?

A new study suggests that the way company executives are paid can influence the risks that they take with product safety. Researchers at Notre Dame University’s Mendoza College of Business found a significant link between substantial executive stock options and future product recalls.

The researchers hypothesized that increased amounts of stock option pay would cause chief executive officers (CEOs) to lean toward being more aggressive in their decision making, rather than being more thorough. The researchers went on to suggest that this could, in turn, lead to an increased likelihood of mistakes in not just the production, but also the design and distribution of goods. To test the theory, the researchers examined product recall data for 386 public companies over the period 2004 to 2011. All of the companies studied were subject to oversight by the U.S. Food and Drug Administration.

As highlighted on the Notre Dame website, the study revealed that stock option pay for CEOs generally increases the likelihood of the company experiencing product recalls in the future. It also found that the relationship between stock options and product recalls was strongest for recently appointed CEOs, whereas CEOs with longer tenures weren’t likely to be influenced by the compensation.

As described by lead researcher Adam Wowak, “This isn’t to say that CEO options are always the culprit when product recalls occur, but our findings suggest that recalls can potentially be an unintended consequence of using options to motivate risk-taking in CEOs.”

As San Diego product liability lawyers, the results of the study are concerning because they suggest that many CEOs are more focused on securing their own personal payouts rather than improving the safety culture of their companies.

If you or someone you love has been seriously injured by a dangerous or defective product, you may be entitled to compensation. Don’t hesitate to contact a San Diego product liability attorney at the Law Offices of Robert Vaage for a free consultation.