Print
E-MailCharles G. McClure is an Associate Professor of Accounting at the University of Chicago Booth School of Business. This post is based on a recent paper by Professor McClure, David F. Larcker, James Irvin Miller Professor of Accounting, Emeritus, at Stanford Graduate School of Business, Shawn X. Shi, Assistant Professor of Accounting at the University of Washington Foster School of Business, and Edward M. Watts, Assistant Professor of Accounting at Yale School of Management.
For years, boards, investors, and firms have said that people are a firm’s most important asset. Today, that claim is increasingly reflected in governance decisions, with boards routinely discussing workforce strategy alongside capital allocation, technology, and risk management. This shift reflects the rise of the knowledge economy and intensifying competition for skilled workers, the so-called “war for talent.” Yet for all the attention human capital receives, much of this discussion remains qualitative, with firms emphasizing culture, training, and engagement in ways that are difficult to compare across firms or tie to concrete governance choices.
This growing focus on human capital has elevated the role of the Chief Human Resource Officer (CHRO), who oversees employees. Not every firm has a CHRO, and even among those that do, the role varies widely in scope and influence. That said, over the past decade, CHROs have become increasingly common in firms and far more involved in strategic decisions, including large-scale reorganizations, culture initiatives, and succession planning. In many organizations, the CHRO now sits alongside the CFO and COO as a core member of the top management team, reflecting the growing belief that how firms manage people is central to long-run success.
At the same time, firms differ markedly in how they structure the CHRO role. In some companies, the CHRO is a strategic partner with meaningful authority and resources. In others, the role remains more administrative, even as firms publicly emphasize the importance of people and culture. This variation raises an important governance question: When is human capital management truly prioritized?
Our paper addresses this question by focusing on the CHRO pay ratio, defined as the CHRO’s total compensation relative to the CEO’s. This ratio reflects how firms allocate resources to the executive responsible for their human capital.
Relative pay is routinely used to signal priorities, scope, and influence within the management team. Viewed through this lens, the CHRO pay ratio provides a concise measure of the extent to which firms treat human capital. Two firms may both have a CHRO, but if one pays its CHRO a small fraction of the CEO’s compensation, while the other pays closer to the CEO, that difference signals very different levels of authority and strategic importance attached to the role.
Using this lens, we examine how differences in the CHRO pay ratio relate to outcomes inside the firm. Firms with higher CHRO pay ratios exhibit higher workforce turnover, a pattern that may initially appear concerning. However, in this setting, turnover appears to reflect more deliberate talent management rather than instability. Firms with higher CHRO pay ratios hire more frequently from competitors and bring in workers with higher credentials, while departing employees accept lower pay at their next employer. Together, these patterns suggest that turnover in these firms reflects active workforce reshaping, with departing employees, on average, being weaker matches.
The CHRO pay ratio also predicts employees’ experiences at the firm. Using employee reviews, we find that firms with higher pay ratios exhibit improvements in sentiment regarding career opportunities, compensation and benefits, culture, and work-life balance. These dimensions are increasingly discussed in boardrooms, yet they are rarely linked to executive-level governance decisions. Our results suggest that how CHROs are compensated plays an important role in shaping employee experiences.
These human capital outcomes matter most if they translate into real economic output. In our analysis, higher-paid CHROs are associated with systematic changes in employee turnover, workforce quality, and employee sentiment. These workforce changes, in turn, are associated with stronger indicators of intangible and knowledge creation across multiple measures, including innovative output, as measured by patent activity. A meaningful share of this increase is attributable to newly hired employees, whose patents account for some of the additional innovation.
We next ask whether these workforce changes translate into higher stock returns. Rather than link stock returns directly to CHRO pay or to individual workforce measures, we examine whether firms that build more knowledge and intellectual capital subsequently perform better in the market. Indeed, we find that firms with higher intellectual capital earn higher abnormal returns in the following year. These return patterns suggest that the workforce changes associated with more empowered CHROs matter to investors to the extent that they improve the firm’s ability to generate knowledge and intellectual capital over time.
To better connect these longer-run return patterns to CHROs themselves, we examine the short-run market reactions around announcements of CHRO appointments. On average, the stock-market reactions to CHRO appointments are modest, suggesting that simply adding a CHRO title does not materially change investor expectations. However, the market reaction is meaningfully stronger when the CHRO is paid more relative to the CEO. In particular, when firms appoint CHROs who are compensated at a high level relative to the CEO, announcement-window abnormal returns are significantly more positive.
These returns-based results suggest that investors distinguish between symbolic organizational changes and appointments that signal real authority attached to human-capital leadership. What matters to investors is not whether a firm has a CHRO, but whether the role is meaningfully empowered.
Our findings highlight an important distinction for boards, investors, and policymakers. The growing emphasis on human capital has elevated the CHRO role, but titles alone are not enough. What matters is whether firms structure and empower the CHRO in a way that allows human capital considerations to meaningfully influence strategy, hiring, and organizational design. The CHRO pay ratio is a straightforward metric that captures this distinction, helping to explain why firms can have such different workforces, levels of innovation, and market outcomes.
For practitioners, the implications are straightforward. Boards overseeing human capital should consider how authority and resources are allocated within the top management team. Compensation committees can use the CHRO pay ratio as a diagnostic tool to assess whether incentives align with stated priorities around people and culture. For policymakers focused on improving the information environment for external stakeholders, our results suggest that CHRO-related choices offer a promising lens for understanding how firms translate rhetoric about human capital into action.
