Bottom Line: Contrary to popular belief, a higher differential between CEOs’ compensation and that of regular employees does not lead to lower worker productivity or more slacking off on the job. In some cases, employees are actually motivated to work harder by the gap in pay—and to close it by moving swiftly up the corporate ladder.
Everyone knows CEOs are wildly overpaid and their employees resent them for it, right? The media loves to stoke the public’s outrage by focusing on the gap between the compensation of CEOs and rank-and-file employees, especially during economic downturns. And the gap keeps widening. A 2005report found that the average CEO in the United States earned 431 times what a non-management worker made in 2004, an increase from 301 times in 2003 and 42 times in 1982.
But a new study suggests that if the employees of these CEOs are bitter about this imbalance, it doesn’t show in their work. The authors found no evidence that a higher pay differential leads to reduced employee productivity or lower firm performance. Instead, some employees appear to view the higher executive compensation as an incentive to work harder—especially at smaller companies where promotions are based on merit rather than seniority.
The authors based their findings on an analysis of executive compensation data for firms in the S&P 1500 indexes from 1993 through 2006. The average worker in the sample brought home US$59,870 a year, while the average CEO earned $4.6 million.