In 1933, the U.S. government asked 2,000 New York-listed companies to disclose how much they paid their top bosses—the first attempt to make executive pay more visible. The idea was to encourage “more conservative management of the industry,” The New York Times reported when it published some front-page results.
But this new publicity did not dampen the reward. Instead, according to a study by Alexandre Mas, a Princeton economist, the opposite happened: Average CEO pay rose, largely because lower-paid executives—now realizing they were indeed being paid lower—pushed for increases that would increase their compensation. which is in line with that of their better paid colleagues.
Nevertheless, the belief that disclosing the CEO’s remuneration would help control the CEO’s remuneration remained more persistent and complex. In 2018, the Securities and Exchange Commission required companies to publish not only executive compensation, but also a ratio that describes how the compensation of a company’s leader compares to the compensation of the average employee.
This new take on pay transparency has been at least as ineffective at moderating CEO pay as the 1933 version: Last year, the median pay for CEOs who had been in their jobs for at least two years was $14.8 million, or 186 times the median employee wages, according to Equilar, which compiles data on corporate leadership.
One reason why it may not have sparked a revolution? Employees already understood that executives were paid exorbitantly and how their own salary compared to that.
The people who learned the most were not the people who worked at the companies, but outside observers. “It was news to investors because investors didn’t have their own wages to make a ratio of,” said Lisa LaViers, an assistant professor at Tulane University’s Freeman School of Business who has studied how disclosing the pay gap affects workers. affects. But, she said, “This isn’t informative for employees in the same way.”
The gap between employee pay and CEOs may also not tell workers much about how fairly they are being paid, said Ethan Rouen, an assistant professor at Harvard Business School whose paper published by The Accounting Review concluded that the ratio was not a good proxy. for fairness throughout an enterprise.
In the research of Mr. Rouen looked at how firm performance was related to the pay ratio between average employees and the firm’s leader.
There are two schools of thought when it comes to how employees understand their pay in relation to that of their bosses. One, known as the tournament theory, suggests that when pay is fair, employees will be motivated to put in more effort when there is more inequality, meaning a bigger prize for climbing the corporate ladder. The other, known as the equity theory, suggests that wage differentials perceived as unfair lead to resentment and lead to poorer performance. Both theories suggest that if pay is fair, employees should be better at their jobs.
If the ratio of employee pay to CEO pay were a good indicator of equity across the company, Mr. Rouen have expected companies with lower ratios to outperform. Instead, he saw no significant difference between them.
However, he found a relationship based on whether the pay of both employees and executives was fairly set. Those with fairer wages, as determined by economic factors examined by Mr. Rouen, performed better.
For workers, the part of the ratio that gets less attention — the worker’s average wage — may be more important than seeing what the top boss earns, Ms. LaViers said.
In a recent working paper, she and co-authors Mary Ellen Carter of Boston College, Jason Sandvik of The University of Arizona, and Da Xu of Tsinghua University used data from the employer rating site Glassdoor to analyze how employees responded when the requirement for companies to disclose that the CEO-to-employee pay ratio came into effect first.
They found that employee satisfaction with pay improved, most likely because employees tend to overestimate how much their coworkers earn. In other words, they expected the average wage to be higher and their own salary to fall lower in the hierarchy.
“The correct number may have been lower,” Ms. LaViers said. “And that made them happier with their own wages.”
The most important thing for employees seems to be not what company leaders make, but whether they believe it – and their own pay – is fair.
The SEC has sought to add some context about fairness to executive pay disclosures with a requirement to show financial performance for up to five years in addition to the pay information that goes into effect this year.
Some researchers and investors argue that fairness is better measured with more information about employees than about executives.
Last year, a group of law and accounting professors, including Mr. Rouen, a letter to the SEC proposing more disclosures about labor investments, including their total compensation, revenue figures, and how many employees are employees or contractors.
“Investors definitely care about how or about the quality of the workplace,” said Cambria Allen-Ratzlaff, the co-chair of a coalition of investment managers pushing for these revelations.
Focusing on more transparency about ordinary pay can also better contribute to the goal of reducing inequality, said Mr. Rouen. The CEO’s pay is not necessarily the problem, he argues. “It’s the fact that wages have held steady, that workers’ power has declined over time, that the federal minimum wage has remained at $7.25 since 2009.”
“It baffles me,” he said, “that we spend so much time disclosing information about CEO compensation and so little about employee compensation.”