CEOs Vastly Overpaid, Most Americans Say

Public supports drastic reductions but is divided on government action

By Stephen Miller, CEBS Mar 31, 2016
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Seventy-four percent of Americans believe that CEOs are paid too much relative to the average worker—even as they grossly underestimate the annual compensation of large-company CEOs, according to the report Americans and CEO Pay: 2016 Public Perception Survey on CEO Compensation. The survey of 1,202 individuals was conducted across demographic groups by the Rock Center for Corporate Governance at Stanford University.

“There is a clear sense among the American public that CEOs are taking home much more in compensation than they deserve,” said David F. Larcker, a professor at Stanford Graduate School of Business, in a post on the school’s website. “While we find that members of the public are not particularly knowledgeable about how much CEOs actually make in annual pay, there is a general sense of outrage fueled in part by the political environment.”

The failure by big companies to make the case for high CEO pay could soon have greater consequences. The U.S. Securities and Exchange Commission issued a rule last year requiring U.S.-based publicly traded companies to disclose how median employee pay compares with CEO compensation—commonly known as the CEO pay ratio. Employers will have to reveal this data for their first fiscal year beginning on or after Jan. 1, 2017. After that, they must identify median worker wages once every three years—or more frequently if there is a significant change in their workforce or pay arrangements.

“Corporations and their boards need to do a better job explaining and justifying CEO pay arrangements,” said Nick Donatiello, lecturer in corporate governance at Stanford Graduate School of Business. “Clearly, companies have not been successful communicating how much value their CEO creates and how much compensation is required, given the market for talent, to attract and motivate the right people.”

Among the Sanford survey findings:

The average American grossly underestimates how much CEOs make.

Public frustration with CEO pay exists despite a public perception that corporate CEOs earn only a fraction of the actual disclosed CEO pay at Fortune 500 companies. The typical American believes corporate CEOs earn $1 million in pay whereas median reported compensation for the CEOs of these companies is approximately $10.3 million, according to pay consultancy Equilar’s CEO Pay Strategies 2015 study, cited in the Sanford survey report.

Americans believe CEOs are overpaid relative to average workers.

 Only 16 percent believe CEOs are paid an appropriate amount relative to the average worker. Responses remain largely negative across party affiliations: Only 25 percent of Republicans believe CEOs are paid the correct amount relative to the average worker, compared to 16 percent of Democrats and 11 percent of Independents.

Nearly two-thirds (62 percent) of Americans believe that there is a maximum amount that CEOs should be paid relative to the average worker, regardless of the company and its performance. The typical American would limit CEO pay to no more than six times that of the average worker. This figure is significantly below current pay multiples, which are approximately 210 times the average worker’s pay, based on Equilar’s compensation figures.

“CEO compensation figures are much higher than the public is aware of,” observed Larcker. “In many parts of the country, it is incomprehensible that anyone can earn this much money.”

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In many parts of the country, it is incomprehensible
that anyone can earn this much money.

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Americans are suspicious about CEO pay for performance.

 When respondents are given a hypothetical situation in which a company’s value increases by $100 million over the course of a year, the mean response on what the CEO should receive as compensation is 3.2 percent of the increase ($3.2 million). “This gets to the heart of the issue of ‘pay for performance,’” said Donatiello. “Either the public is not sold on the idea that CEOs should share in value creation to the extent that they do, or they do not believe that CEOs play an important role in value creation. Clearly companies need to make a stronger case for how pay is tied to performance—to the extent it is.”

Americans are split on whether the government should get involved.

 In terms of a solution, approximately half of respondents (49 percent) believe the government should do something to change current CEO pay practices.

Those who favor government intervention support a range of possible actions:

  • 28 percent of those who advocate government intervention would substantially increase taxes on CEO compensation above a certain amount.
  • 25 percent would set a strict limit on the dollar amount a CEO can receive relative to the average worker.
  • 17 percent would limit the absolute dollar amount that a CEO can receive.

“Public consensus is that there is a problem. There is much less agreement on a solution,” noted Brian Tayan, researcher at Stanford Graduate School of Business.

CEOs and Directors See Things Differently

A companion survey of 107 CEOs and directors of Fortune 500 companies, also sponsored by Sanford’s Rock Center for Corporate Governance, found that corporate leaders believe that CEOs are paid the correct amount. As reported in CEOs and Directors on Pay: 2016 Survey on CEO Compensation:

  • 76 percent of CEOs and directors believe that CEOs are paid correctly, based on the expected value of compensation awards at the time they are granted.
  • CEOs (84 percent) are slightly more likely than directors (71 percent) to have this opinion.

 “When most directors think CEO pay is reasonable but most Americans believe that CEO pay is a problem, then you have a serious perception gap,” cautioned Donatiello.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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