Public Views on CEOs Earnings

Frank B. Glassner is the Chief Executive Officer of Veritas Executive Compensation Consultants, LLC (Veritas). This post is based on his Veritas memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.

“Does Disney CEO Bob Iger have a good explanation for why he is being compensated more than $400 million, while workers at Disneyland are homeless and relying on food stamps to feed their families?” tweeted Bernie Sanders last year. Elizabeth Warren has also repeatedly criticized the remuneration of CEOs as being far too high. The following, from the Guardian, is typical of the kind of reports that crop up in the media on an almost weekly basis: “Chief executives at the US’s top companies took home $17.2m in pay last year—278 times the salary of their average worker.”

Implicit Salary Beliefs

Surveys have revealed that a majority of Americans think it is inappropriate for top executives to earn tens of millions of dollars per year. According to a survey by beqom, a compensation software company, 78% of U.S. workers believe that CEOs are paid too much money compared to employees.

But why do so many people consider CEO compensation to be far too high? Is it simply envy? Certainly, envy plays a role. However, implicit salary beliefs are at least as important. These beliefs reflect the standards people apply when they are asked to decide whether a salary is “fair” or, as in the case of very high executive remuneration, “excessive.”

In the public debate on executive compensation, it is repeatedly claimed that it is impossible for a manager to work 100 or 300 times longer or harder than a regular employee, and therefore such high salaries are unjustifiable.

In an Ipsos MORI survey in 2018, 39% of American respondents said it was inappropriate for managers to earn 100 times more than regular employees because they don’t work 100 times longer or harder. In Germany, as many as 63% of respondents expressed the same opinion, even though German CEOs earn far less than their American equivalents. C-suite managers with Germany’s 30 largest companies (listed on the DAX stock market) earn an average of just €7.5 million per year (approx. $8.5 million).

The fact that more Germans than do Americans believe that top-tier managers’ salaries are far too high, despite the fact that German executives earn significantly less than their U.S. counterparts, proves that the level of remuneration alone cannot be the reason for the criticism.

The Harder You Work, The More You Should Earn?

People who claim that executive salaries are too high because there is no way CEOs work so much longer or harder than average employees are demonstrating what I refer to as an “employee mindset.” They believe that salaries should be determined or measured primarily based on the number of hours someone works or how much effort they put into their job. In their opinion, salaries are a form of direct compensation for time spent on the job or a “blood, sweat and tears premium.” And because a top-tier manager doesn’t sweat 100 times more or work 100 times longer, adherents of the “employee mindset” naturally conclude it is “unfair” for CEOs to earn so much.

Employees are thus projecting their own performance and remuneration benchmarks onto top managers and believe that there must be a close relationship between how hard or how many hours someone works and their remuneration—and they do not see this type of direct correlation when they read stories about top managers pay packages. That’s why regular workers think that managers’ salaries are excessive, because no manager works 100 times longer or harder than an average employee.

On the other hand, the fact that manager salaries are determined by supply and demand on the market for top executives is not at all widely understood. Only 23% of the Ipsos MORI survey’s United States respondents agreed that companies could only get the best managers by paying very high salaries, because otherwise top-tier talent would move to other companies that do pay more or set up their own businesses.

Although time input and qualifications typically play a major role in salary considerations in other occupations, they are not particularly relevant in determining the remuneration of top-tier managers. Rather, CEOs negotiate their salaries within the very narrow market for top executives. C-suite remuneration is determined by supply and demand, just like the pay of elite athletes.

The basketballer Stephen Curry earns more than $40 million a year—and the reason is not that he sweats a hundred times more during a game or that he trains a hundred times harder than a less talented basketball player. He earns so much because he has a rare ability. The analogy between an elite athlete and an elite executive can be taken even further. When a company or basketball franchise signs a top manager or top athlete, they base their remuneration on their new hire’s past performance. Their forecasts could prove to be right, but they could also be wrong.

Ideas Are The True Source Of Incredible Wealth

For entrepreneurs, who usually earn far more than top-tier managers, high earnings are usually a reward for particularly good ideas. The richest people in the world are those who have the best ideas and invent or market products and services that satisfy the needs of hundreds of millions or even billions of consumers. Just think of Larry Page and Sergey Brin, who invented Google, Amazon founder Jeff Bezos or Bill Gates of Microsoft. Of course, Jeff Bezos hasn’t worked a million times longer or harder than the average employee, but he has had great ideas that have been especially beneficial to hundreds of millions of people. Ideas that others didn’t have or couldn’t implement.

But this world, where rare skills and good ideas are rewarded, is out of the reach of most workers and employees, who, based on their experience, believe that someone with better qualifications deserves to earn more. And anyone who works 50 hours deserves to earn more than someone who works 40 hours. This “employee mindset” is largely alien to top managers and entrepreneurs, who know that nobody pays them by the hour or based on the volume of sweat they produce. A large proportion of a CEO’s salary is linked to the performance of their company’s share price. It is not the number of hours they work that earns them their very high salaries. It is how much value they add to their companies.

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