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Does A Huge Pay Gap Between CEO And Staff Affect Employee Satisfaction?

According to Glassdoor, the average CEO of a public company earns 204 times the median worker’s salary. Does it matter to staff?

Does A Huge Pay Gap Between CEO And Staff Affect Employee Satisfaction?
[Photo: Flickr user Ryan Schmitz/www.digitalphotographyhobbyist.com]

We all know executives at big companies are handsomely compensated for their work. Although, just how much more they make than their average employees has long been a hot-button issue. This new economic research should only serve to fuel that debate.

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Glassdoor pulled employees’ salary reports from its platform and compared it to companies in the S&P 500. Across all companies, the average CEO pay was $13.8 million per year, while the average worker earned a median salary of $77,800. That means the average is 204 times higher than the average employee’s.

This has been a tough number to calculate because corporate reports for investors don’t disclose what a typical employee earns even though they contain information on CEO compensation. And while Congress approved the Dodd-Frank law in 2010 requiring that such information be published, it’s taken the Securities and Exchange Commission until this month to finalize the rule. Though it won’t go in effect until 2017, and gives public companies some flexibility to determine what the CEO-to-worker pay ratio should be, they will be required to disclose that ratio.

Before the law, calculating the CEO-to-worker pay ratio was left to researchers such as those at the Economic Policy Institute, which drew from a variety of data, including from the Federal Reserve. For its survey, Glassdoor took the data it’s gathered since 2008 on thousands of voluntary and anonymous salary reports from employees (adjusted for inflation) of the S&P 500 companies, juxtaposed with compensation information directly from those companies’ SEC proxy filing statements, all of which were available (except for Mylan N.V., Kraft Heinz Co., Columbia Pipeline Group Inc., Baxalta, PayPal, and Westrock Co.).

Using these unique data, Glassdoor tabulated the ratio of CEO pay to median worker pay. Glassdoor chief economist Andrew Chamberlain notes that total compensation for employees includes base pay, tips, commissions, bonuses, and all other forms of pay reported. To ensure statistical validity, only companies with 30 or more Glassdoor salary reports shared by employees during this timeframe are included, which was available for 441 of the S&P 500 companies. 

Chamberlain also points out that while CEO pay also includes bonuses, stock options, and other pay beyond base salary in SEC filings, most workers underreport bonuses and stock options in surveys, such as Glassdoor’s salary survey. “Most workers simply don’t know or don’t recall the details of nonsalary compensation. As a result, total pay is likely underreported for workers, which could overstate CEO pay ratios,” he says.

Chamberlain says that drawing from the last two years of SEC filings might also be slightly misleading because CEO compensation changes from year to year with swings in bonuses and stock compensation. “Choosing different base years for our analysis would have a large effect on the rankings of CEO-to-worker pay for these employers,” he observes. 

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There is also the question of job titles, because, Chamberlain says, the distribution of job titles for salary reports on Glassdoor does not necessarily represent the full distribution of positions at these companies. “Companies for whom a disproportionate number of low-skilled (or high-skilled) workers have reported their pay on Glassdoor may have median worker pay that is biased downward (or upward),” he explains. “Companies don’t typically disclose their actual distribution of job titles, making it impossible to assure that all jobs are fairly represented when calculating median worker pay.”

Moving beyond the caveats, Glassdoor also included a ranking of employee satisfaction against the CEO-to-worker pay ratios, which added another dimension to the data.  

Here are some of the results:

The company with the highest ratio of CEO pay to median worker pay is Discovery Communications. CEO David M. Zaslav earned $156 million in 2014, while median worker pay was $80,000, for a pay ratio of 1,951. Glassdoor’s employee satisfaction rating was 3.8 (out of a potential 5).

The second highest is Chipotle, where CEO Steve Ells earned $28.9 million while median worker pay was $19,000, for a pay ratio of 1,522. Glassdoor’s employee satisfaction rating was 3.4.

Rounding out the top five with the highest pay ratios are CVS Health (CEO Larry J. Merlo earned 1,192 times his average employee’s salary–employee satisfaction was at 2.7); Walmart (Douglas McMillon earned 1,133 times more–employees rated the company a 3), and Target (Brian C. Cornell, pay ratio of 939 with an employee satisfaction grade of 3.2).

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The lowest CEO pay ratio was zero at Fossil, whose CEO Kosta Kartsotis reported $0 compensation in 2014. Fossil’s SEC filing reports: “Mr. Kartsotis again refused all forms of compensation for fiscal 2014. Mr. Kartsotis is one of the initial investors in our company and expressed his belief that his primary compensation is met by continuing to drive stock price growth.” Employees gave Fossil a 3.4 rating.

The second and third lowest CEO pay ratios (also effectively zero) were at companies whose 2014 chief executive officers reported $1 salaries: Google’s Larry Page and company earned a 4.4 rating; and Kinder Morgan chief Richard D. Kinder, whose company scored 3.4 on the employee satisfaction scale. Rounding out the five with the lowest pay ratios are Urban Outfitters (Richard A. Hayne, pay ratio of 3 and a 3.3 satisfaction rating), and Facebook’s Mark Zuckerberg, with a pay ratio of 4 times more than the average staffer, yet earned a 4.4 satisfaction grade.

If you’re wondering where Jeff Bezos and the Amazonians fall in this mix–especially given the dustup surrounding the company and its allegedly toxic culture–he’s close to the bottom of the list (one removed from Facebook). Bezos reported a total compensation package of just over $1.6 million, while his average worker earned about $114,000. That makes his pay 15 times higher. Employees on Glassdoor rated their satisfaction at 3.4 out of 5, which isn’t terrible or great, just middling.

Pay Ratio Vs. Happy Employees

Though both Google and Facebook get high marks from their employees and have a low CEO-to-worker pay gap, Chamberlain insists that there is no significant correlation between employee satisfaction and how CEO pay compares to employee pay, as there are cases in both camps.

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“This may not be a huge surprise, because very few employees really know what their CEO earns, or what the median pay is at their employer overall,” he tells Fast Company, but that may all change with this report and with the SEC’s new ruling.

And even though Larry Page at Google earned just $1 and the search giant scored high marks for satisfied staffers, Chamberlain questions how long his total compensation will remain at this level. “It hasn’t always been this low, which is one reason he likely is taking this incredibly low salary right now, simply because he can,” says Chamberlain.

The Impact of Transparent Wages

What Glassdoor has done in advance of the new SEC rules is to present new ratios of CEO pay to worker pay based on their proprietary salary reports. Chamberlain says the results shed new light on pay inequality inside some of the largest public companies. He believes this will impact all companies, prompting change even in those with the smallest gaps.

“We may see CEOs and top executives being held more accountable, as the more money you earn, the more responsibility and weight you tend to have on your shoulders,” he explains. “We may also see executive boards and companies who either raise employee pay or perhaps lower CEO and executive pay.” Only time will tell, says Chamberlain.

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About the author

Lydia Dishman is a reporter writing about the intersection of tech, leadership, and innovation. She is a regular contributor to Fast Company and has written for CBS Moneywatch, Fortune, The Guardian, Popular Science, and the New York Times, among others.

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