Quick: How much did your CEO get paid this year? What did any CEO get paid? You may not know the exact amounts, but you probably think the answer is, “Too much money.” According to research from 40 countries that probed the thoughts of CEOs, cabinet ministers, and unskilled employees, we all think leaders should be paid less. Beyond that, we are clueless. Where we err can be calculated by an organization’s pay ratio, or the ratio between CEO pay and average worker pay. In the United States, for example, the average S&P 500 CEO is paid 354 times what the lowest-ranking employee makes, for a ratio of 354:1 (eight times greater than in the 1950s). Yet, U.S. participants in the study
estimated that the ratio between CEOs and unskilled workers was only 30:1! Americans are not alone in making this gross underestimate: Participants from Germany, for instance, estimated a ratio of around 18:1 when the actual is closer to 151:1. In general, people worldwide are unhappy with—and
demotivated by—their perception of inequity, even when their estimates of the ratios are far below the reality. Taking the German example further, the ideal ratio of CEO pay to unskilled workers as judged by study participants was around 7:1. To put it all together, then, people think the ratio should be 7:1, believe it is 18:1, and don’t realize it is actually 151:1. For all the countries worldwide in the study, the estimated ratios were above the ideal ratios, meaning participants universally thought CEOs are overpaid. How does this affect the average worker’s motivation? It appears that the less a person earns, the less satisfied the person is with the pay gap. Yet virtually everyone in the study wanted greater equality. The ideal ratio, they indicated, should be between 5:1 and 4:1, whereas they thought it
was between 10:1 and 8:1. They believed skilled employees should earn more money than unskilled individuals, but that the gap between them should be smaller. No one in the United States would likely think the 354:1 ratio is going to dip to the ideal of 7:1 soon, although some changes in that direction have been suggested. Other countries have tried to be more progressive. The Social Democratic Party in Switzerland proposed a ceiling for the ratio of 12:1, but putting a cap into law was considered too
extreme by voters. No countries have yet been able to successfully impose a maximum ratio.
Therefore, the job of restoring justice perceptions has fallen to CEOs themselves. Many CEOs, such
as Mark Zuckerberg of Facebook and Larry Page of Google, have taken $1 annual salaries, though they
still earn substantial compensation by exercising their stock options. In one extremely recent example, Gravity CEO Dan Price cut his salary by $1 million to $70,000, using the money to give significant raises to the payment processing firm’s employees. Price said he expects to “see more of this.” In addition, shareholders of some companies, such as Verizon, are playing a greater role in setting CEO compensation by reducing awards when the company underperforms.
Questions
7-13. What do you think is the ideal ratio? Why might the ideal vary from country to country?
7-14. How does the executive compensation issue relate to equity theory? How should we determine what is a “fair” level of pay for top executives?
7-15. The study found that participants thought performance should be essential or very important
in deciding pay. What might be the positive motivational consequences for average employees if CEO
pay is tied to performance?
Sources: J. Ewing, “Swiss Voters Decisively Reject a Measure to Put Limits on Executive Pay,” The
New York Times, November 24, 2013, http://www.nytimes.com/2013/11/25/business/swiss-rejectmeasure-to-curb-executive-pay.html?_r=0; C. Isidore, “Gravity Payments CEO Takes 90% Pay Cut to Give Workers Huge Raise,” CNN Money, April 15, 2015, http://money.cnn.com/2015/04/14/news/companies/ceo-pay-cuts-pay-increases/; S. Kiatpongsan and M. I. Norton, “How Much (More) Should CEOs Make? A Universal Desire for More Equal Pay,” Perspectives on Psychological Science 9, no. 6 (2014): 587–93; A. Kleinman, “Mark Zuckerberg $1 Salary Puts Him in Elite Group of $1 CEOs,” The Huffington Post, April 29, 2013, www.huffingtonpost.com; and G. Morgenson, “If Shareholders Say ‘Enough Already,’ the Board May Listen,” The New York Times, April 6, 2013, www.newyorktimes.com.
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