How Much is Too Much for CEO Pay
How much is too much? If you applied this to soft drinks, perhaps 5 cans of soda a day is too much. But what about 3? There are things we can agree on as a society that crosses the threshold of being “too much.” Yet, it’s a relative question and broad-based agreement is tricky.
When we talk about money, the same applies. Some folks might say so and so makes too much money. Perhaps, but where (and who) draws the line? CEOs are often targeted when it comes to folks making too much money. It’s natural to place the guy or gal at the top in the crosshairs. After all, if you work for a company, odds are the person making the most is the CEO. But how does CEO compensation affect other areas of the business? Moreover, is there an ideal ratio of the compensation of a CEO to the median compensation of a company’s employees?
These two questions have been batted around for decades. The prominent management scholar, Peter Drucker, was outspoken on the issue, warning that an ever-widening ratio would prove problematic for the health of the business and society as a whole. Intuitively this is rational. Rising inequality can result in more discontent. So it is only natural that the Drucker Institute, founded by the late Mr. Drucker, is the latest to return to these pending questions.
Drucker Institute researchers examined 482 public companies with disclosed pay ratios. They then applied 34 different indicators to rank them over five areas: financial strength, innovation, customer satisfaction, social responsibility, and employee engagement. Drucker stated back in 1998 that he’d advise managers to try and maintain a 20-to-1 salary ratio at their companies. Anything beyond, reasoned Drucker, would create resentments and negatively affect morale.
The Drucker Institute, not surprisingly, are fans of the late Drucker. So when their researchers ran the numbers they were shocked at the outcome. In short, companies with the highest pay ratios faired the best in all five areas. Those companies with the highest pay ratios (upwards of 481:1) measured overall effectiveness scores of 57 on a 0-100 scale. Meanwhile, those in the lowest quartile were 50. The customer satisfaction spread was similarly substantial as was innovation and the others. So what does this mean?
One explanation the Institute provided was most of CEO pay is in stock and stock options. At the time the data was pulled share prices for many of these firms were robust, hence increased compensation. Another explanation came in the form of numerous studies that refute these findings – pay disparity essentially mattering to employee satisfaction and similar areas.
One could take the Institute’s results and argue the sky is the limit in terms of paying CEOs. Or conversely, in keeping a firm’s median wages stagnant. Both sound untenable and bad for business. Yet, perhaps what these findings point to is the difference in pay is not as “political” as it was when Drucker was alive. We could point to many publications that would say otherwise, however, which is why this issue will continue to be studied for the conceivable future.