Everyone Agrees: CEOs Should Be Paid Less

BY KYLE CHAYKA
from Pacific Standard

The longest lasting impact of the Occupy movement might just be the conflict between the “99 Percent” and the “One Percent”—the term that has come to symbolize the vast wealth inequality that exists in this country. As it turned out, the one percent is something of a misnomer. The top 0.01 percent of Americans actually control the majority of wealth, and that very top slice is growing wealthier faster than anyone else in the economy

The discrepancy between the one percent and 0.01 percent highlights both the negative branding of the idea of the one percent and the fact that our perceptions of inequality often don’t line up with reality. We tend to think the economy is more equal than it is, as a viral infographic video pointed out. In the video, it’s shown that 92 percent of Americans, in a study, chose an ideal wealth distribution that looks relatively even throughout the spectrum, in which the top 20 percent held about a third of the overall wealth. Americans thought that things were less equal than the ideal, with the top 20 percent holding over half of all wealth. Yet in reality, the final bar graph showed, the top 20 percent held over 80 percent of wealth.

Harvard Business School professor Michael Norton provided the data for that surprising video through his research on the perception of inequality. Norton continues his study with a new paper (co-written with Sorapop Kiatpongsan) focusing specifically on the salaries of CEOs, the business leaders who have become a byword for the one percent as a whole. Norton measured how much citizens of 50 different countries thought CEOs earned as well as how much they thought CEOs shouldearn.

The paper is subtitled “a universal desire for more equal pay”—which is precisely what Norton found. People believed that CEOs made less than they actually do (CEOs make 380 times the average worker, as an AFL-CIO study showed) and wanted the gap between CEO and unskilled worker pay to be even smaller than they expected it to be. The estimated pay ratio was an average of 10:1 across all countries studied, while the ideal was 4.6:1. The actual ratio is anywhere from 50:1 to a staggering 351:1, as the gap stands in the United States.

“There seems to be a misperception at the root of this; we don’t understand the scale of inequality,” Norton says. Yet the issue has gained in urgency. With recent legislation over minimum wage and the required public disclosure of CEO compensation, “there’s a renewed focus on both ends of the spectrum, on how much the lower income segment makes and how much the wealthy make,” he says.

Norton’s survey takes a more emotional, intuitive measure of wealth inequality than a statistical study like a census might—respondents were simply asked to fill in a blank with how much they thought CEOs made and how much unskilled workers made, in local currency. This is their “beliefs about the gap in pay,” Norton says.

What is compelling about the findings is the diversity in beliefs about wealth and equality all over the world. “We didn’t know if every country in the world would underestimate [CEO pay] and want it to be more equal,” Norton says. All respondents did feel that CEO compensation should be lower, even across political spectrums from left to right, but perceptions are also universally off. “Every country thinks their ideal is more equal than they think it is right now,” Norton says.

However, despite the difficulty of envisioning the scale of income inequality at large, different countries are able to correctly perceive where they stand in relation to each other. “Americans are relatively more comfortable with more inequality than people in Denmark,” Norton says. In “countries that have smaller gaps, people do think they have smaller gaps.”

The study shows a global consensus for increased equality as well as a perception that the world is more equal than it is. This alone should be enough for a push against ballooning CEO compensation. But if another reason is required, a separate study published this month demonstrates that CEO pay “is negatively related to future stock returns for periods up to three years after sorting on pay.” In other words, the more the CEO of a company is paid, the less likely it is to perform as well as companies with not-so-superstar bosses.

“Firms that pay their CEOs in the top 10 percent of excess pay earn negative abnormal returns over the next three years of approximately negative 8 percent,” the report reads. “The effect is stronger for CEOs who receive higher incentive pay relative to their peers and stronger for CEOs with greater tenure.” The lower returns are associated with CEO over-confidence that leads to over-investment and disastrous mergers and acquisitions. The more unequal the company, the worse they’re doing. Sounds like some demotions are in order.

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