CEO Pay: It’s About More Than Just the Numbers

In the world of business, compensation structures have always been an issue. Employees no doubt want to be paid well, and many are willing to change jobs to ensure that happens. However, the fiercest debate over employee pay in recent years has focused on the compensation of one type of employee in particular: the corporate CEO. 

Along with the issue of CEO turnover, compensation for top executive positions has been discussed at length in board rooms, on media outlets, in employee cubicles, and even at dinner tables. In many cases, even politicians want to get involved. 

As awareness of CEO pay reaches an all-time high, keep in mind that it’s about more than just numbers. CEO pay affects employees at the company, corporate shareholder profitability, and even the economy at large. 

Learn about the recent trends in CEO pay, how the gap between CEO and employee pay affects companies, and what the future holds for this controversial issue.

An Assessment of Recent CEO Pay Trends

According to the Economic Policy Institute, CEO pay has risen more than 1,200% since 1978. Today’s CEOs are making nearly eight times what the top 0.1% of U.S. wage earners are getting. This translates to a stark 344 times what the average employee in the U.S. earns each year, a figure that has seen only a 15.3% increase in the last 40+ years.

CEO compensation often extends beyond monetary payments — CEOs frequently receive other forms of lucrative benefits, such as stock options. However, these additional benefits are not always transparent to employees and the general public when a company reports on CEO pay. This raises concerns about corporate governance.

While some argue that CEOs are paid so well because of the high demand for increasingly complex skill sets, other experts have asserted that CEO pay is more a reflection of their ability to negotiate concessions. Some economic experts and employees also believe that concentrating wealth at the top breeds inequalities when there is little left for those at the bottom.

How Employee Sentiment Is Shaping Up

A large majority of Americans — 73% — believe that CEOs are paid too much. When people crunch the numbers on just how big the pay gap is, that number rises to 79%. 

Many employees understand, on some level, that CEOs deserve a salary that matches the skills they bring to the company. Still, many on both sides of the political aisle also believe that companies and governments should take action to solve the pay gap. 

The Economic Policy Institute has its own recommendations, such as levying more taxes on CEOs and corporations to de-incentivize large pay raises. However, employees have suggested other solutions — three in five believe that employee compensation should rise with CEO pay. Others support a cap on the CEO-employee pay ratio.

How the CEO-Employee Pay Gap Affects Companies

The point of hashing out the data isn’t to make CEOs feel bad about compensation. It is to show that the difference in wages between CEOs and their employees affects more than just a company’s image. It can also result in a loss of overall productivity and performance. Research has shown that this gap can lead to several issues between employers and employees.

Employee Morale

In many cases, large CEO-employee pay gaps lead to what experts call the “perception of injustice.” Whether there is actually a lack of fairness when it comes to CEO pay is hotly debated, but the fact that employees perceive this to be the case can lead to deep dissatisfaction among the workforce. 

Productivity

Unfortunately, low morale can often lead to another problem: employee disengagement. While employee engagement has been low since 2020, knowledge of the CEO-employee pay gap has the potential to affect it even more. 

Low engagement can lead to a 14% difference in productivity, an 18% difference in sales, and a 10% difference in customer ratings. It can also lead to a 23% difference in overall business profit.

Turnover Rates

Business leaders must also realize that long-term losses in employee morale and engagement can lead to high employee turnover. In fact, depending on how high your turnover is on a regular basis, engagement can make up to a 43% difference in rates.

Just as some consider CEO pay to be a huge expense, turnover is also expensive. Research has found that turnover can cost any individual company up to two times an employee’s salary, adding up to millions of dollars lost for corporations. 

With 48% of employees open to leaving their organizations, high levels of turnover cost companies a trillion dollars per year collectively.

Considerations for Moving Forward

It’s critical for CEOs and corporate leaders to realize that this issue is now in the purview of the U.S. federal government. In 2018, the SEC adopted a disclosure rule requiring companies to publicly reveal their CEO-median employee pay ratio.

This led to efforts to amend tax policies so that high ratios would result in greater tax penalties. Portland and San Francisco adopted such rules in 2016 and 2022, respectively.

In November of 2023, lawmakers introduced the Curtailing Executive Compensation (CEO) Act, which is designed to both limit excessive CEO pay and raise employee pay by introducing an excise tax for companies with high CEO-employee pay ratios. 

This high level of political action in recent years solidifies the fact that CEO pay is much more than just a corporate issue and affects those beyond the company’s walls.

Boards Must Remember What’s at Stake

As all stakeholders consider the issue of CEO pay, it’s important to remember what truly matters. Everyone deserves fair pay for their expertise and service, including top executives. Having attractive CEO pay is important to corporate success, and thriving corporations are key to a stable economy.

Still, employees at every level must feel valued. It is worth examining CEO-employee pay ratios to ensure that everyone’s pay is fair and equitable. This is what most related legislation is attempting to accomplish.

CEOs who truly care about organizational health must recognize the importance of employee morale and engagement. When all employees (including the CEO) practice empathy and fairness, it brings positive results for the entire company.