Will Your Employees Be Happy When They Learn How Much the CEO Makes?
The report, which compares CEO pay to median worker pay at companies in the S&P 500, found that “[a]cross all companies, the average CEO pay was $13.8 million per year, the average median worker pay was about $77,800, and the average ratio of CEO pay to median worker pay was 204.”
Among the companies with the largest CEO to employee pay ratios are Chipotle, where CEO Steve Ells earns 1,522 times what the median Chipotle worker earns, and Walmart, where CEO Douglas McMillon earns 1,133 what the media Walmart employee earns.
Glassdoor’s survey was sparked by the Securities and Exchange Commission’s (SEC) recent announcement that, starting in 2017, public companies will be required to share ratios of CEO pay to median worker pay.
According to Dr. Andrew Chamberlain, chief economist at Glassdoor, the SEC’s new rules may have a significant impact on candidates’ decisions regarding where they’d like to work.
“We already know that the majority of job seekers want to work for a company that embraces workplace transparency, which includes salary transparency, so knowing a CEO’s salary, or what others earn within the organization, will likely have an impact on the recruiting and retention of employees,” Dr. Chamberlain explains.
Chamberlain believes that, in the wake of this SEC decision, companies that choose not to disclose information about CEO and median worker pay may be at a “competitive disadvantage” in the talent market — even if they aren’t public companies required to share such information under the new rules.
“They may be seen as outdated or even as if they’re hiding something among prospective candidates,” says Dr. Chamberlain. “It will impact the job search and job-decision process for many job seekers, as this will now be an added data point they take into consideration when determining where to work.”
It Hasn’t Always Been This Way
While a CEO to median employee pay ratio of 204 may not seem like a lot to some, it’s much higher than this ratio was in the past. In 1965, for example, the average CEO to employee pay ratio was only 20. Between 1978 and 2013, CEO compensation increased by 937 percent, whereas the typical employee’s compensation increased by only 10.5 percent in the same time period.
In part, Dr. Chamberlain believes the rapid rise of CEO compensation may have to do with globalization.
“As more companies expanded quickly, and most notably became global companies, revenues grew dramatically in many cases over time, which is one explanation as to why CEO pay grew as well, [as it is generally] tied to the performance of the company,” Dr. Chamberlain says.
Additionally, Dr. Chamberlain also notes that tighter competition for talent may have driven up CEO compensation.
“As [this growth and globalization] happened, competition in some industries became even tighter, which also contributed to CEO pay increasing, due to demand outpacing the supply of top-notch leaders with global experience,” Dr. Chamberlain explains.
Should CEO Compensation Be So High?
Putting aside ethical consideration and looking at this purely from a business perspective, it really depends on a few different factors.
To start, many CEOs make much of their compensation in the form of bonuses tied to company performance. So, Dr. Chamberlain says, even if a high CEO to employee pay ratio “raises some eyebrows at first glimpse,” it may turn out to be totally justified on the basis of company performance.
When it comes to determining whether a CEO’s pay is “too high,” Dr. Chamberlain says companies need to think about how a CEO’s “total pay will impact employees, investors, business partners, clients, and so on.”
“If it’s truly justified and clear, there shouldn’t be much of an issue,” Dr. Chamberlain says. “But, when CEO pay is incredibly high and there doesn’t seen to be a rhyme or reason behind the figure, that’s what can be risky for companies. It’s up to each executive team and its board of directors to really determine how their CEO should be paid, how that pay will be communicated so everyone understands, and what factors go into it.”
All that being said, Dr. Chamberlain does believe that the SEC’s new ruling will spur some changes in the realm of CEO compensation.
“For instance, we may see CEOs and top executives being held more accountable, as the more money you earn, the more responsibility and weight you tend to have on your shoulders,” says Dr. Chamberlain. “We may also see executive boards and companies who either raise employee pay or perhaps lower CEO and executive pay. Only time will tell.”
Employers, a day of reckoning may be coming. Are you prepared to explain why your CEO makes so much more than the median employee? If so, you may be in a pretty good spot. If not — you may see your employer brand take a plunge as talented candidates and employees question why they’re making so little when the CEO is, for lack of a better term, rolling in it.