Do you know how much corporate leaders earn and how that compares with the average worker? If you do, you’re unusual. In most places, including the United States, people have a tendency to vastly underestimate the difference.
In 2012, the average CEO of an S&P 500 company earned $12.3 million a year, compared to just $35,000 for the average American worker. That’s 354 times as much. And yet, when asked, people will say the ratio is just 30-to-1.
It’s true of other countries, too. Research by Michael Norton at Harvard Business School and Sorapop Kiatpongsan from Chulalongkorn University, in Thailand, finds a widely similar pattern across both countries and–interestingly–across different types of people. People everywhere think the gaps are smaller than they are, and also that they should be smaller.
The academics used data from the International Social Survey Programme from 2012, which asked people in 40 countries to estimate earnings for a CEO of a national company, a cabinet minister in the central government and an unskilled factory worker, and also how much each of these individuals should earn.
You can compare the results in the charts below, which come from the Harvard Business Review. The estimated ratios are in red, with the “ideal” ones (what people think the ratio should be) in blue.
Some of the biggest differences between estimated and actual earnings are in the U.S. and Switzerland. Some of the biggest differences between estimated and ideal earnings are in Australia, South Korea, France, and Germany.
Although the issue of income inequality is often associated with the left, the study actually finds broad concern across political and other groups.
“These results demonstrate a strikingly consistent belief that the gaps in incomes between skilled and unskilled workers should be smaller than people believe them to be–and much smaller than these gaps actually are,” Norton and Kiatpongsan say. “People all over the world, and from all walks of life, would prefer smaller pay gaps between the rich and poor.”
The paper doesn’t offer reasons why people underestimate the differences, though there are possible explanations for why inequality should be a widely held concern. Companies with big pay disparities could be harder to manage. There’s a lot of research to show that people work harder when they feel they’re being treated fairly. The great management thinker Peter Drucker cautioned companies to keep the ratio below 20-to-1, for instance.
More generally, inequality is bad for economies, as you need a broad base of consumers for everyone to get richer. People who earn more than they need tend to hoard, rather than spend what they have. That means the wealth isn’t flowing back into the economy.