This post is based on the Perspectives on Psychological Science article (November 2014), “How Much More Should CEO’s Make: A Universal Desire for More Equal Pay,” by Sorapop Kiatpongsan and Michael J. Norton. They used a survey based on 55,238 respondents in 40 countries. These respondents estimated the wages of people in different occupations–chief executive officers (CEOs)—cabinet officers—and unskilled workers and also provided their estimates of what their pay should be. Data from 16 countries was used to show that the respondents were dramatically underestimating actual pay inequality. Although the specific magnitude of the pay estimates differed across countries and across specific demographic groups, the clear conclusion is that people underestimate actual pay gaps and their ideal pay gaps are even further from reality than those underestimates.
This underestimation was most conspicuous in the United States where the actual pay ratio of CEOs to unskilled workers (354:1) far exceeded the estimated ratio (30:1) which in turn exceeded the ideal ratio (7:1). The United States presents an interesting case where the ratio of the average CEO to an average employee increased from 20:1 in 1965 to 354:1 in 2112. Peter Drucker, the management guru, suggested that exceeding this 20:1 ratio would increase employee resentment and decrease morale.
An interesting question is how all this came about. There was a business professor, whose name I have unfortunately forgotten, who published an article he intended to decry the gross overcompensation of CEOs, but the law of unintended consequences was at work. These data were used as a basis for pegging and increasing CEO compensation. A candidate could use these data to estimate what the going rate was and boards of directors felt a need to be competitive and kept increasing the offers.
The obvious question here is what can be done about it. The passing of laws or regulations is one idea, but there are probably creative ways to circumvent them. I believe that the problem stems from corporate structure. Currently there is a CEO and a Board of Directors. They take good care of each other. This is not good for the company, the company ‘s stockholders, the company’s employees, or the company’s customers. Elections usually consist of a ballots distributed to stockholders with one list of candidates for the Board of Directors. This board selects the CEO and they take good care of each other. Elections with one set of candidates is what is used by totatalitarian states. I never respond to these elections. I demand viable competitive candidates before I vote in any election.
I think corporations should be required to issue ballots where there are at least two candidates for every available position. Then shareholders could vote for candidates who committed to reeling in CEO compensation and perhaps even their own compensation.
I know that the argument against this is that shareholders are not knowledgeable enough to vote, nor do they want to extend the effort to familiarize themselves with the candidates. I would argue that in our democracies there is ample evidence that voters not only frequently do not know the candidates, but also vote against their own interests. Although our democracies might not function effectively, they usually manage to minimize the subversion of power. In others words, they do have some level of control that is absent from corporate governance.
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Tags: Boards of Directors, CEO compensation, CEOs, compensation, corporations, elections, equality, inequity, pay ratios, Perspectives on Psychological Science, Peter Drucker, Sorapop Kiatpongsan, stockholders, United States