Economy

Americans Have No Idea How Much Less They Make Than Their Companies’ CEOs

CREDIT: AP

Coca Cola CEO Muhtar Kent made $18.2 million in 2013 -- and that was a steep pay cut from the year before.

The CEO-to-worker pay gap is 10 times worse than Americans think it is. According to a new survey they drastically underestimate the pay ratio between the people in charge and those who serve them.

Americans estimated that the ratio of CEO pay to unskilled worker pay is about 30-to-1, new research by scholars at the Harvard Business School and Thailand’s Chulalongkorn University reveals. In reality, the average S&P 500 company CEO earned 354 times what the average U.S. worker did in 2012, the researchers say. Americans said that ideally that gap would be 6.7-to-1

Using survey responses from more than 55,000 people in 40 countries, Professors Sorapop Kiatpongsan and Michael Norton report prevailing beliefs about what the relationship between executive and worker pay is and what it ought to be. Americans report both one of the highest estimated ratios and one of the highest preferred ratios. (Only Australians wish for a more unequal compensation relationship between CEOs and workers, with an ideal ratio of 8.3-to-1.)

The survey data allow researchers to break responses down by political ideology, producing an interesting finding. Those with left-leaning political views tended to report higher estimates of the pay gap than centrist or conservative respondents, as one might expect. But that ideological influence disappears when it comes to the preferred relationship between worker and CEO pay: “the ideal ratios for both groups were strikingly similar,” the researchers write, “suggesting that whether people agree or disagree that current pay gaps are too large, they agree that ideal gaps should be smaller.”

That finding is aggregated across several countries rather than reported for Americans specifically, but one co-author said the ideological consensus around reshaping the CEO-to-worker pay ratio holds up. “It is the case that these trends toward consensus hold in the US,” Prof. Norton said in an email. “In an earlier paper, for example, we showed that Americans of all stripes – liberal and conservative, rich and poor, men and women – agreed that the ideal distribution of wealth should be more equal than they believed it to be.”

But even if Americans reflect the same convergence in preferences about CEO pay, America remains exceptional when it comes to the reality of compensation for corporate officers. That 354-to-1 pay ratio Norton and Kiatpongsan use is by far the largest of the 16 countries for which they found such data. It is well more than twice the ratio of the next-largest gaps, which are just below 150-to-1 in both Switzerland and Germany.

This pay disparity between CEOs and working people in the U.S. has exploded in the past three decades. After hovering between 20-to-1 and 30-to-1 from the 1960s through the late 1980s, the ratio doubled to roughly 60-to-1 under President George H. W. Bush, leapt to more than 100-to-1 at the outset of President Clinton’s term, and spiked to nearly 400-to-1 at the height of the dot-com bubble at the turn of the millenium. Subsequent recessions have only made minor, temporary dents in the figure.

Part of the reason America’s pay gap exploded is that Congress encouraged companies to lard up CEO pay packages. Performance bonuses and stock options are tax deductible, meaning that every taxpayer is subsidizing the CEO pay gap. CEOs routinely receive performance incentives even when they fail to hit the productivity targets that were supposed to trigger the bonuses, signalling a broken relationship between corporate executives, corporate compensation boards, and actual economic performance. Management consultants have spent decades recommending higher and higher pay packages at the top of company rosters, and economic elites have reaped the rewards of that advice.

As CEO compensation ran rampant in the past decade, real wages for the working class held flat (even though worker productivity increased dramatically).

In 2013, the median CEO got paid $10.5 million, the first time on record that the median figure cracked the $10 million mark.