In fact, Americans may have grown accustomed to the idea that C-suite executives would take home tens of millions of dollars a year, while the rank and file see their wages rise by a few percent.
Last weekend, the granddaughter of the Walt Disney Company’s co-founder scolded the company over CEO Bob Iger’s $65 million pay package and started a broader conversation.
Disney challenged the company to redirect half of its executive bonus pool into $2,000 checks for the lowest-paid 10% of its 200,000-person workforce. Like Democratic congresswoman Katie Porter’s public shaming of JPMorgan CEO Jamie Dimon at a hearing a few weeks ago, Disney’s thread and subsequent Washington Post op-ed struck a strong moral tone, and received a strong public response.
Her call for the company to compress its wage scale might also be smart business.
The argument for astronomical executive pay boils down to this: There’s a thin market for skilled leadership, so companies have to pay competitively. Also, since the 1990s compensation has largely been made up of stock awards, which means the CEO gets paid handsomely only if the company does well financially.
That doesn’t turn out to be true in practice.
“CEO pay of course has skyrocketed, and it has absolutely nothing to do with productivity in any way, shape or form,” says Judith Samuelson, director of the business and society program at the Aspen Institute. “Once you satisfy people’s need, money is not as big a motivator.”
A lot more goes into a company’s stock price than the CEO’s business strategy. Other important factors include the health of the economy, and external factors impacting the business’ overall sector. For example, low gas prices might allow more people to visit amusement parks such as Disneyland. Also, CEOs can drive up the company’s stock without doing anything to improve its fundamentals, through moves like buying back shares.
On top of that, CEOs have benefited from decades of “benchmarking.” A salary consultant will look at a peer group of top executives, and recommend a package valued at the 75th percentile, which has ratcheted up compensation levels over time.
Corporate governance reforms since the financial crisis over a decade ago have done little to curb exorbitant pay packages. Although shareholders now have the right to vote on how much they’re paying the CEO, they typically rubber-stamp the board’s recommendation, as long as the stock price remains healthy.
Little consideration, however, is typically given to how competitively the company is paying workers on the lower end of the wage spectrum — despite research showing that higher wages make a bigger difference for people who weren’t making much money to begin with.
Under those circumstances, higher wages can motivate workers to put in more effort, especially if the extra cash comes as an unexpected gift, according to a field experiment with 266 employees. Better pay also increases retention, which cuts down on the cost of recruiting and onboarding new employees. Finally, companies that pay substantially above market rates are better able to attract the best workers, as companies like Costco and the Container Store have learned.
Of course, pay isn’t the only thing that matters for lower-skilled workers. Training, benefits programs, and a whole suite of other operational choices can help workers’ lives while improving performance — as articulated most comprehensively in MIT professor Zeynep Ton’s book “The Good Jobs Strategy.”
Investors are starting to realize it. An official advisory committee to the Securities and Exchange Commission last month recommended that the commission consider requiring companies to disclose an array of human capital management metrics, such as turnover rates and surveys of employee satisfaction.
“Today how a company manages its workforce is a big determinant of their return on invested capital and profitability,” said John Streur, president and CEO of the investment management firm Calvert Research and Management, at a recent hearing in the Senate Banking Committee. “It tells us whether management is expert at creating a workforce that can be globally competitive of the long term.”
All of that suggests that companies would be well-served to spend less on the executive bonus pool and more on strategies that improve life for their frontline workers and lower level managers. At the very least, it would improve morale, increase the disposable income of people most likely to spend it, and make the American economy seem a little more fair.
“I think you could cut the pay of CEOs in half, and the economy would be the same size as it was last year,” said Larry Mishel, former president of the Economic Policy Institute, which has long published studies of the CEO-worker pay ratio. “I don’t think we have to argue that workers will be more productive, we just have to say that they’re going to be better off, and it’s hard to see that the firm will be worse off.”