CEO compensation has always been a subject of debate and while we may not know how much they actually make, there is a general belief that they are overpaid.
A survey led by the Rock Center for Corporate Governance, an initiative of Stanford Graduate School of Business and Stanford Law School, on this public perception validates this.
The survey interviewed 1,200 Americans on what CEOs earn, how they should be paid for performance, and whether government should be involved.
The research conducted by Stanford professors David F. Larcker, Nicholas E. Donatiello and Brian Tayan showed that 74% of the respondents believed that CEOs are overpaid.
Overall, however, respondents were of the view that most CEOs are paid less than a tenth of what they actually make—on average, the respondents thought CEOs earned nearly $1 million, whereas the real average is about $10 million.
“CEO compensation figures are much higher than the public is aware of,” writes Larcker, a Stanford Graduate School of Business professor of accounting and the lead researcher on the study. “In many parts of the country, it is incomprehensible that anyone can earn this much money.”
The study also points out that CEO pay has risen sharply over the past few decades and CEOs in the US today can make between 210 and 300 times what their workers earn. It is well known that companies use high salaries to attract top talent or reward those leaders who increase company value. But the Stanford survey shows Americans are sceptical that CEOs actually create that additional value, and they don’t think they should be rewarded for it.
For example, when respondents were asked how much a CEO should be paid if he or she increased the value of a company $100 million over a year, responses varied greatly. The median answer was $500,000, while the mean response was $3.2 million.
The divergence in responses, according to the researchers, should raise a red flag for companies, which set CEO pay. Additionally, they should be able to justify those numbers. According to Donatiello: “Clearly, companies have not been successful in communicating how much value their CEO creates and how much compensation is required to attract and motivate the right people.”
It’s a strange dichotomy that while Americans might be concerned about steep CEO pay cheques, they aren’t sure how to reduce them. Nearly half of the survey respondents think that the government should step in to regulate compensation, but a third think the government shouldn’t intervene. Not surprisingly, higher wage earners and political parties like the Republicans would rather keep Uncle Sam out of the conversation.
The Stanford survey thus concludes that while the general consensus is that CEO compensation is a problem, there is no consensus about the role of government intervention in restricting or influencing CEO pay.