Does It Help to Know How Much the Boss Makes?

In 1933 the U.S. government asked: 2,000 companies The company will be listed on the New York Stock Exchange and will disclose the compensation amounts of its executives. This is the first effort to make executive compensation more visible. The idea was to encourage “more conservative management of the industry,” The New York Times reported when it ran some of the results on its front page.

However, this new promotion did not reduce the rewards. Instead, according to one study, Alexandre MasAccording to economists at Princeton University, the opposite happened. The rise in average CEO compensation was largely due to lower-paid executives realizing they were actually underpaid and pushing for pay increases to bring their pay in line with their higher-paid peers. This is because ‘.

Nonetheless, the notion that revealing CEO compensation could curb executive compensation has persisted and become even more complicated. In 2018, the Securities and Exchange Commission asked companies to publish not only executive salaries, but also ratios that show how company leaders’ salaries compare to median employee salaries.

This new idea of ​​salary transparency is at least as ineffective as the 1933 version at adjusting chief executive salaries. Last year, the median salary for chief executives who had been in office for at least two years was $14.8 million, 186 times the median. Employee salaries correspond to this, according to Equilar, which collects corporate leadership data.

What is one of the reasons it did not start a revolution? Employees already knew that executive salaries were exorbitant, and how their own salaries compare.

It was the outside observers who learned the most, not the people who worked inside the company. “For investors, this was news because they invested in At home, I couldn’t set my own wage ratio,” he said. But “this is not beneficial for employees,” she said.

Ethan Luhan, an assistant professor at Harvard Business School, said the pay gap between employees and chief executives may not tell employees how fairly they are paid. A paper published in the Accounting Review concluded that the ratio was not appropriate. A company-wide equity agent.

Rouen’s study examined how firm performance is related to the ratio of wages between median employees and firm leaders.

There are two schools of thought about how workers perceive their salaries relative to their bosses’ salaries. One of his theories, known as the tournament theory, is that if wages were fair, workers would put in more effort as inequality increased, meaning they would get bigger prizes in climbing the career ladder. It means that you will be The other, known as the ‘fairness theory’, suggests that wage disparities seen as unfair create resentment and lead to poor performance. Both theories suggest that workers should do better if wages are fair.

If the ratio between employee pay and CEO pay was a good indicator of fairness across a company, Rouen would have expected companies with lower ratios to perform better. Rather, no significant differences were found between them.

However, he found a relationship based on whether the salaries of both employees and executives were set fairly. Those with fairer wages performed better, as determined by the economic factors Rouen studied.

For employees, it may be more important to look at the under-the-radar part of the payroll — the median employee salary — than to look at the earnings of their top bosses, Laviars said.

In a recent research paper, she and co-authors Mary Ellen Carter of Boston University, Jason Sandvik of the University of Arizona, and Da Xu of Tsinghua University said that employer review site Glassdoor We used the data to analyze how employees responded when companies met the following requirements: Revealing that the CEO-to-employee pay ratio was first enforced.

They found that employee satisfaction with their salary increased. This is probably because employees tend to overestimate the income of their colleagues. In other words, they expected the median salary to be higher and their own salary to be lower within their stratum.

“The exact figure could have been lower,” Laviere said. “As a result, they became more comfortable with their salaries.”

It seems that what matters most to employees is not what the company’s leaders do, but whether they believe it and their own pay is fair.

The SEC seeks to add fairness context to executive salary disclosures with a requirement to present up to five years of financial performance alongside salary information that will take effect this year.

Some researchers and investors argue that it may be appropriate to measure fairness by providing more information about employees than about management.

Last year, a group of law and accounting professors, including Rouen, letter to the SEC It proposes further disclosures about investments in labor, such as total compensation, turnover, and number of employees and contractors.

“Investors absolutely care about what the quality of the workplace is, or what the quality is,” said Cambria Allen Ratzlaff, co-chair of the investment management coalition that promotes such disclosures.

Rouen said a focus on greater transparency about salaries for rank-and-file workers could also better meet the goal of reducing inequality. Chief executive compensation isn’t necessarily an issue, he argues. “There is the fact that wages continue to be stagnant, the labor force is declining over time, and the federal minimum wage has remained at $7.25 since 2009.”

“It blows my mind that they spend so much time disclosing CEO salaries and so little about employee salaries,” he said.

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