Here’s Why CEO Pay Matters
The Great Recession hit the U.S. economy pretty darn hard, and American workers are still recovering. We’ve learned, in recent years, that an improving economy doesn’t necessarily mean better pay for workers. However, despite these challenging economic trends, top executives continue to earn huge sums of money, especially compared with how much their employees make and when measured against how much people in their position used to earn in decades past. Let’s take a look at a few facts about CEO pay and also examine why it really does matter, quite a lot actually, to you and your employer.
(Photo Credit: Schill/Flickr)
1. CEO compensation has skyrocketed in the last 35 years.
According to data from the Economic Policy Institute, recently explored in a piece by Susannah Snider of U.S.News, CEO compensation has surged in the last 35 years or so. When adjusted for inflation, CEO salaries rose 997 percent from 1978 to 2014. Workers, on the other hand, saw a much more modest 10.9 percent gain.
The discrepancy between top executive and worker pay has always been vast. But, there is a huge difference between the CEOs of 1978, who made about 30 times what the average worker earned, and the CEOs of 2014, who earn about 300 times more.
Researchers from Harvard Business School and Chulalongkorn University in Thailand surveyed people across 40 countries to learn more about global thoughts and feelings regarding CEO pay. It turns out that, regardless of socioeconomic status, nationality, etc., people feel that top executives earn too much, compared with workers.
They also tend to underestimate how vast the gap actually is between these two groups. Workers in the U.S., for example, estimated that CEOs made about 30 times what the average worker earned; but we know that the truth falls at about 10 times that estimate. When asked what they thought would be fair, the average American worker felt top execs should earn about seven times as much as their workers.
When top executives earn in a day what it takes their average worker almost a year to make, it has a big psychological impact. Researchers have found that the vast discrepancy weakens loyalty within an organization, and that it decreases performance. There are consequences not just for underpaid workers, but also for shareholders.
“People have been trying to justify why CEOs get paid so much,” Charles O’Reilly, director of Stanford GSB’s Center for Leadership Development and Research, told Stanford Business. O’Reilly has conducted research in an attempt to better understand CEO compensation. “What people haven’t been looking at is the consequences of making a wrong decision — paying too much or too little. This study is evidence that there are consequences. Overpayment leads to an increased wage bill. That’s money the shareholders would otherwise get. Overpayment of the CEO also leads to turnover at lower levels.”
4. It doesn’t even support the performance of CEOs.
It’s not surprising that the vast pay gap discussed here has a negative impact on workers, but some research suggests that it’s also bad for CEOs and their companies. It turns out that the highest-paid CEOs are also the worst performers. According to this extensive research, the more a CEO earns, the worse their company does over the course of the next three years. For example, the organizations whose CEOS were among the top 5 percent in terms of pay were found to do 15 percent worse than their competitors, on average.
“They ignore dis-confirming information and just think that they’re right,” study author Michael Cooper told Forbes. “That tends to result in over-investing – investing too much and investing in bad projects that don’t yield positive returns for investors.”
It’s almost impossible to comprehend a world in which CEO pay continues to increase at the rate in has in recent decades. Companies would be wise to consider moving worker and top executive salaries toward one another instead of further apart.
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