Are CEOs properly compensated, compared with unskilled workers? If you think so, you're in the minority. That's one takeaway from recent research by Chulalongkorn University’s Sorapop Kiatpongsan and Harvard Business School’s Michael Norton.
Their other key finding is a fascinating distillation of what people think CEOs should make compared with unskilled workers. Here are the numbers, according to Gretchen Gavett’s superb summary on the Harvard Business Review blog:
- U.S.-based respondents to the survey Kiatpongsan and Norton used believe that, ideally, CEOs should earn 6.7 times what unskilled workers earn.
- The actual CEO-to-worker compensation ratio at U.S.-based companies in the Fortune 500 is 354. That's right: On average, Fortune 500 CEOs earn 354 times what unskilled workers at their companies do. In actual numbers, the average CEO compensation is $12,259,894, compared with $34,645 for their workers.
What does it all mean for today’s leaders and entrepreneurs? From my perspective, these numbers present a clear opportunity to differentiate yourself—specifically, to brand your company as a leader in progressive compensation practices.
Why would you do this? Mainly because you’ll earn extreme employee loyalty and customer respect. Consider the recent six-week saga that played out in New England at Market Basket, a supermarket chain of 71 stores. The short version of the saga is this: Employees were willing to lose their jobs to protest the firing of a longtime CEO who they believed was exceptionally generous in terms of compensation and benefits. Moreover, during the six weeks, customers largely sided with fired CEO Arthur T. Demoulas and the employees. It was as if they felt, to quote a headline in Esquire, that “the last stand for the middle class” was taking place in the parking-lot protests at Market Basket’s headquarters.
What steps can you take, then, to brand yourself as an organization taking a stand against what many see as unjust compensation disparities? Interestingly, it’s another supermarket leader—John Mackey, co-founder of Whole Foods—who has famously advocated for making compensation transparent. One of the main transparencies at Whole Foods is this: Whole Foods caps executive pay at 19 times the pay of the average store worker.
Here’s the thing. In 2007, Whole Foods raised the executive compensation cap from 14 times the average pay to its current 19 times. The reason, Mackey stated in a letter to all employees, was “to make the compensation to our executives more competitive in the marketplace.” In addition, Mackey told Inc. last year that raising the cap might happen again in the future, if Whole Foods again needs to remain competitive for executive talent.
The point here is not to nitpick at Whole Foods. It’s only to say that the company faces a different executive recruiting-retention challenge than that of its ratio-free rivals. And if it needs to increase the ratio, it needs to manage how employees and other shareholders will react to that change. But those seem like small prices to pay for maintaining a policy that brands the company’s compensation practices as unassailably progressive.