Does it help to know how much the boss earns?

Does it help to know how much the boss earns?

In 1933 the US government asked 2,000 corporations It listed on the stock exchanges in New York to disclose how much it paid its top bosses – a first attempt to make executives’ pay more visible. The idea was to encourage “more conservative management of the industry,” the New York Times reported when it published some of the results on its front page.

But this new publicity did not affect the payment. Instead, according to one study alexandre maesA Princeton economist, the opposite happened: Average chief executive compensation increased, mostly because low-paid executives—now realizing they were actually underpaid—pressed for pay increases that pushed their compensation up. fell in line with their higher-paid counterparts. ,

Nonetheless, the notion that disclosing chief executive salaries will help keep executive compensation in check has stuck, and has become more complex. In 2018, the Securities and Exchange Commission required companies to publish not only executive salaries, but also a ratio that tells how a company’s leader’s pay compares to its average employee’s pay.

This new approach to pay transparency has been ineffective in controlling CEO pay, at least as far back as the 1933 edition: last year, the average salary for CEOs who had been at their jobs for at least two years was $14.8 million. or was 186 times higher than the average. Employee salaries, according to Equilar, which aggregates corporate leadership data.

One reason could be that it has not started any revolution? Employees already understood that the executives were highly paid and how their own salaries compared to that.

The people who learned the most were not the people working in the companies, but the outside observers. “This was news to investors because investors didn’t have their salaries to make up the ratio,” said Lisa LaViers, assistant professor at Tulane University’s Freeman School of Business, who has studied how disclosing the pay gap affects workers. have an impact on. But, he added, “it’s not informative to employees in the same way.”

Even the difference between worker and chief executive pay may not tell employees how fairly they are being paid, said Ethan Rouen, an assistant professor at Harvard Business School, whose paper was published by The Accounting Review in which It was concluded that the ratio was not good. Proxy for fairness in a company.

Mr. Rouen’s study looked at how the performance of companies related to the ratio of pay between the average employee and the company’s leader.

There are two schools of thought when it comes to how employees perceive their salaries in relation to their bosses’ salaries. One, known as tournament theory, suggests that when pay is fair, workers will be motivated to put in more effort when there is greater inequality, which means a greater reward for climbing the corporate ladder. The second, known as equity theory, suggests that pay gaps perceived to be unfair lead to resentment and poor performance. Both theories suggest that if pay is fair, workers should be better at their jobs.

If the ratio of employee pay and chief executive pay were a good indicator of fairness across the company, Mr. Rouen would have expected to see companies with lower ratios perform better. Instead, he did not see any significant difference between them.

However, they found a relationship based on whether the wages of both workers and executives were set appropriately. As determined by the economic factors Mr. Rouen examined, those with fair wages fared better.

For employees, the part of the ratio that gets less attention — average employee pay — may be more important than seeing what the top boss makes, Ms. LaViers said.

In a recent working paper, he and co-authors Mary Ellen Carter at Boston College, Jason Sandvik at the University of Arizona and Da Xu at Tsinghua University used data from the employer review site Glassdoor to analyze whether companies need How did the employees react when it happened? Disclosure of the ratio of chief executive and employee pay first took effect.

They found that workers’ satisfaction with pay improved, most likely because workers anticipate earning more than their peers. In other words, they expected the average salary to be higher, and their own salary would fall further down the hierarchy.

“The exact number may be lower,” Ms. LaViers said. “And as a result, they were happier with their own pay.”

It appears that what matters most to employees is not what company leaders earn, but whether they believe it — and their own pay — is fair.

The SEC has tried to add some context about fairness in executive pay disclosure by requiring it to show up to five years of financial performance along with salary information, effective this year.

Some researchers and investors argue that fairness can be better assessed by more information about employees rather than executives.

Last year, a group of law and accounting professors including Mr. Rouen were sent a letter to the sec Offer more disclosures about investment in labor, including their total compensation, turnover numbers and how many workers are employees or contractors.

“Investors absolutely care about how the workplace is or what the quality of the workplace is,” said Cambria Allen-Ratzlaff, co-chair of the Alliance of Investment Managers, which stresses these disclosures.

Mr Rouen said the goal of reducing inequality could also be better served by focusing on greater transparency about rank-and-file pay. He argues that chief executive pay is not necessarily the problem. “The fact that wages have remained stagnant has reduced the power of workers over time, with the federal minimum wage remaining at $7.25 since 2009”.

“It boggles my mind,” he said, “that we waste so much time disclosing information about CEO pay and so little about employee pay.”

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