The growing gap between what executives earn and what the average employee earns has been of increasing concern to campaigners over the past few years. The dangers of an extremely high gap are aptly illustrated by a recent study from the University of California, Berkeley, which shows that companies with a large gap between their CEO’s pay and average pay are viewed as less attractive to potential recruits.
The researchers hoped to discover how employees felt when they learned what their executives earned. The data suggests that the larger the pay gap, the worse the perception of the company is from the perspective of not only employees but also consumers.
“Our results indicate that consumers are less interested in purchasing from and getting a job at companies with high CEO-to-worker compensation ratios,” the authors say.
Public information
Understanding how people respond to this information is vital, as the Security and Exchange Commission now requires publicly held companies to disclose the CEO-to-worker pay ratio. The data to date suggests an average ratio of a whopping 361:1, with the gap around ten times as large for Fortune 500 companies.
Interestingly, neither consumer or employee was more concerned by this disparity of pay as in the actual amount the CEO made. The researchers believe this suggests a visceral response to an apparent lack of any corporate profits trickling down to the pay packet of average workers.
“This likely reflects a psychological aversion toward inequity, which develops early in life,” the authors say. “For example, if a CEO makes a great deal of money, but the average worker also makes a good wage, people feel that the wealth is being distributed more fairly and in turn will have a more positive impression of the company.”
Lack of trickle down
The researchers believe that this lack of trickle down could make it harder for companies to recruit the talent they crave, and also even attract the level of investment they need to fund growth. They even believe it could result in lukewarm reviews on sites such as Yelp, Glassdoor and TripAdvisor.
Despite this generally negative perception of companies with a large pay disparity, this does not seep through into the perception of their chances of success or ability to innovate. What’s more, the perceptions softened when they learned what CEO’s actually did each day and the responsibilities they have.
After reading fictional descriptions of a company, which were modeled on those from an actual company, participants were given data on their CEO-to-worker pay ratios, with the ratio veering from 25:1 all the way up to 350:1. They then rated the companies on things such as employee engagement, work-life balance, innovation, fairness and trustworthiness, alongside the likelihood that they would purchase products from that company and working for them.
“Our study shows that CEO-to-worker ratios really matter to employees and consumers alike,” the researchers say. “These results demonstrate that, now that publicly traded companies have started to disclose their CEO-to-worker ratios, they need to be cognizant of and prepared for the effects such disclosure may have.”
Suffice to say, the data is largely hypothetical, so there has to be an element of doubt as to how reliable the findings are, and whether they would transfer into real-world behaviors. Nonetheless, they are interesting findings that warrant further examination.
