No, CEOs Don’t Need to Make 271 Times What Workers Make

by Kate Harveston

What, exactly, does a CEO do? The answer is a little different for every company, but it seems self-explanatory that a good CEO needs to make sure their company has all the right pieces in place to be successful.

CEOs also expect to be well-paid, and you can’t help but ask the question: At what point does that become a conflict of interest? Recent studies of how the difference between CEO and worker salaries affect productivity are revealing what many already assumed was true. It’s bad practice for CEOs to rake in exorbitant amounts while employees scrape by.

In 2016, Google CEO Sundar Pichai made a hair under $200 million. He wasn’t the highest paid executive in the US, though. That honor goes to Marc Lore, CEO of e-commerce at Wal-Mart, who pocketed $243.9 million. The average hourly rate for an employee at Wal-Mart is $13, which equates to about $27,000 per year.

That disparity — the difference between what a CEO makes and what line workers make — is becoming an important indicator of company ethics. So much so that the SEC is requiring that companies implement CEO pay rate disclosure as a regular practice in communications to shareholders beginning in 2018. For the top 350 companies in the United States, the ratio currently stands at 271-to-1. Perhaps this is the reason Apple CEO Tim Cook made “only” $12.8 million in 2017.

Since the end of the recession in 2009, wages have slowly crept up across the board. However, CEO salaries, which are often associated with stock performance, tend to shoot up without any increase in wages for workers below them. That’s a problem.

Re-investing the fruits of success is a critical part of growing a business. But when almost every penny a company makes is spent paying the CEO, those wins don’t get spread out to line workers, and the result is a feeling of stagnation. CEO pay tends to grow more quickly than that of line workers, even though any one of the CEOs from those 350 companies is already making more than enough to live comfortably.

Workers might expect that their CEO will make a good deal more than them, but when they find out how much more — and nowadays, they do find out — it can have negative impacts on performance. Equity theory holds that a difference in pay is typically interpreted as unfair, even when that difference is expressed as a ratio like CEO-to-employee.

When the numbers come out, those in low-paying jobs who don’t feel like they have a path to the top might feel that they have been condemned to a life of penury by their corporate overlords. It’s a situation that has been aptly named “corporate backlash.”

So, what should CEOs make? Having the responsibility of an entire company on your back ought to earn you a healthy sum, right?

Right, but companies need to do a better job of making it clear to employees where all that money is going. A good CEO does this in two ways. First, by managing the pay ratio gap so that employees don’t feel they are being treated unfairly. Second, by fostering a positive corporate culture that allows people to develop and grow — thereby encouraging them to stay with the company.

Backlash occurs in situations where neither of these criteria are met. It’s understandable that employees will make less than their CEOs, but when their compensation is comparatively strong compared to their company’s competitors, they are much less likely to act out or leave.

In addition to the new SEC regulations, workers will be paying attention to how Trump’s tax cuts affect their lives in 2018 and beyond. Only some of the new tax law is guaranteed to help them. During the first three years, people will get more in their paychecks. However, the real takeaway from Trump’s changes is a lower rate for companies, which stays on after cuts for lower brackets wear off.

Companies will have to make decisions about what to do with this money. Obviously, the way to improve morale among lower-level workers is to spread the extra cash around, rather than funnel it all to CEOs and upper management. But can we really trust that companies will choose this route?

As much as we love to talk about the American dream and how anyone can get ahead in this country, the indicators of a growing rift between the upper and middle class are dangerous. If you’re sitting on the company board and want to keep hardworking people around, you might want to take a second look at where the money’s going.

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