Why investors target the executive pay gap


By Sabine Vollmer

An analysis of global survey data is offering companies a better understanding of the mindset of investors who object to executive pay packages.

Based on data of more than 55,000 survey participants in 40 countries, the analysis by Harvard Business School and Chulalongkorn University in Bangkok suggests that people believe the pay gap between executives and unskilled workers is too wide – and many of the respondents underestimated actual pay inequalities.

The analysis found that across the full sample, the estimated pay gap between chief executive and unskilled workers was about twice as large as respondents around the world considered ideal.

The median ratio respondents worldwide considered ideal was CEO pay that was 4.6 times larger than unskilled workers’ pay. The median estimated ratio was that CEOs are getting paid 10 times as much as unskilled workers.

The gap between estimated and ideal pay was largest in South Korea, Australia, Taiwan, Chile, and the US.

In the US, for example, respondents would consider it ideal if CEOs got paid about eight times as much as unskilled workers. They estimated that CEO compensation is 29.6 times larger, but that was much less than US labour union research suggested it actually is. According to the AFL-CIO’s 2014 Executive Paywatch, the annual compensation of a CEO of a Standard & Poor’s 500 company is 331 times a worker’s annual wages.

The analysis by Harvard and Chulalongkorn researchers went beyond the US, comparing estimated and actual pay gaps in 16 countries where data on CEO compensation and average worker wages were available.

The difference between estimated and actual pay was largest in the US, Germany, Switzerland, and Spain.

With increasing transparency of pay gaps in US Securities and Exchange Commission filings, US shareholders have begun to notice and object by voting down executive compensation packages and filing lawsuits.

A recent example is Cheniere Energy, a natural gas export company based in Houston. At Cheniere’s annual shareholder meeting on September 11th, shareholders rejected the $142 million compensation package for Cheniere’s CEO in an advisory, nonbinding vote. “No” votes made up 54% of the ballots cast.

Related CGMA Magazine content:

Five Tips on Setting Compensation for Senior Execs”: C-suite compensation has drawn increased scrutiny for several years. Here are five tips for remuneration committees to use as a guide in setting executive pay levels.

CEO Pay Rises Faster Than CFO Pay”: Average CFO compensation rose 17.4% from 2010 to 2012, but CEO pay increased faster. Data from BDO USA showed that the executive pay gap for midsize public companies is getting slightly larger. See which sector showed the highest average pay for CEOs and CFOs.

Four Internal Factors to Consider When Determining Executive Pay”: Although shareholders are voicing their frustrations by registering disapproval of executive compensation packages, business leaders believe shareholders ought to have more say in top execs’ pay. There is considerable support for linking public company executives’ pay to performance.

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.

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