What is average ceo to employee pay ratio us

If you thought the pandemic might have made a dent in the wealth gap between CEOs and rank and file workers, you’d be wrong. In fact, average CEO pay increased 31% over the last three years and median pay rose 11%.

Man sweeping money

That’s according to recent rankings of compensation from JUST Capital, a nonprofit that ranks large publicly traded companies on their performance in such issues as governance and labor policies.

With those findings in mind, the organization set out to explore Americans’ views of CEO pay. The bottom line: Most U. S. adults say the growing CEO-worker pay gap is a problem.

“People, regardless of ideology, see that CEO pay is too high,” says Alison Omens, chief strategy officer at JUST Capital.

Certainly, Just Capital’s latest rankings of large companies found that the early days of the pandemic did nothing to stem the increase in CEO compensation. In fact, the average CEO-to-median -worker pay ratio as of 2020 is 235:1, up from 212:1 three years before.

Furthermore, certain industries had ratios with particularly wide disparities. Those with the highest pay gaps—averaging above 340:1 from 2020 to 2022—included many sectors, such as restaurant and leisure and healthcare, that employ large numbers of frontline workers. Those with the lowest pay gaps—averaging below 160:1 from 2020 to 2022—included banks, capital markets and computer services.

The other side of the coin: an April report from Brookings that surveyed 22 companies employing more than 7 million frontline workers. It found that only one-third pay at least half their employees a living wage. Company shareholders were rewarded five times more than workers.

In February, researchers at polling company SSRS, which conducted the survey, interviewed over 1,000 U.S. adults to investigate their opinions about the state of CEO compensation, what companies should be doing about the CEO-worker pay gap and whether they think workers are undervalued by companies.

Some findings:

· Almost nine in 10 (87%) agree that the growing gap between CEO pay and worker pay is a problem in this country.

· 72% say that companies should have CEO compensation caps, regardless of performance.

· 85% agree that one way America’s largest companies can meaningfully act to reduce income inequality is by raising their minimum wage to a living wage.

· 81% believe large corporations are responsible for ensuring the basic financial security of their lowest-paid workers.

· 80% say the recent wave of worker strikes and support for labor unions are seeking to address the fact that large corporations have undervalued employees for too long.

“Pay levels are an indicator for people of how a CEO is treated vs. how workers are treated in a company,” says Omens.

The survey also revealed that Americans are pretty well-informed about the current state of CEO pay. Researchers questioned a control group, which didn’t see any statistics beforehand, and another group that did. On the whole, responses were similar. Among the former, 73% said that most CEOs of America’s largest companies are compensated too much vs. 13% who responded they are paid the “right amount.” Among the latter, 79% felt the pay level is excessive vs. 10% who said they receive an acceptable sum.

The average S&P 500 CEO made $15.5 million last year, 299 times the pay of the median worker, according to America's largest labor union. AFL-CIO states that it represents an increase on the 264-to-1 ratio from 2019 and that it came amid widespread job losses due to the Covid-19 pandemic. The annual findings are widely cited as a measure of workforce equality and this year's data is especially concerning. The average S&P 500 CEO saw their pay increase by $700,000 last year and by some $2.6 million over the past decade.

AFL-CIO states that the ratio of CEO-to-worker pay is important because "a higher pay ratio could be a sign that companies suffer from a winner-take-all philosophy where executives reap the lion's share of compensation". It adds that "a lower pay ratio could indicate the companies that are dedicated to creating high-wage jobs and investing in their employees for the company's long-term health". Among S&P 500 companies, the worst industry on average was the discretionary sector (including companies such as Amazon), where the ratio was 741:1.

Many individual companies have far worse pay ratios, however. The research shows that out of all S&P 500 companies, Aptiv Plc has the most staggering CEO-to-worker pay ratio with its boss, Kevin Clark, making 5,294 times its median employees' pay at the end of fiscal year 2020. The Western Digital Corporation had the second most pronounced pay gap at 4,934:1 while, ironically, Gap came third at 3113:1. Other well-known names such as Nike and The Coca-Cola Company are also high up on the AFL-CIO list with pay ratios of 1,935:1 and 1,621:1, respectively.

*Click below to enlarge (charted by Statista).

Largest CEO-to-worker pay ratios at S&P 500 companies in 2021

Recently, a CEO told us something along the lines of this: "I am trying to set a bit of a frame for a remuneration conversation—for myself and other leaders. One way of talking about it is the ‘appropriate´ ratio of lowest to highest paid, from the front lines to CEO. I also recall you saying that if you ask employees what they think, the usual response is in the order of 6 to 8 times. Is my memory accurate? Are you aware of any empirical basis for this? Or have I made it up?!"

Before revealing if our client's memory is accurate or not, let's first stress the importance of this touchy subject.

Overpaid CEOs and underpaid employees

The phenomenon of firms with overpaid CEOs and underpaid employees is not new. In 1977, the late Peter F. Drucker, arguably the most famous management thinker, suggested the pay ratio between CEOs and employees be a maximum of 25-to-1.

However, in 2011, he scaled it slightly back to a ratio of 20-to-1. Drucker said at the time: "I have often advised managers that a 20-to-1 salary ratio is a limit beyond which they cannot go if they don’t want resentment and falling morale to hit their companies."

Sadly, his advice was not followed by many. In fact, the exact opposite happened, and to a massive and practically grotesque extent: The CEO-to-employee pay ratio has increased from 20-to-1 in 1996 to 202-to-1 in 2018.

Take that in for a moment. Do some math if you’d like.

Instead of following Drucker's advice towards a fairer work environment, we have entered a period where executive pay has been rising almost exponentially, with executive fat cats now earning in days what front-line employees earn in a whole year.

The actual and estimated pay ratios

So, back to the client's memory. It was accurate. There is an empirical basis for his claim, and it can be seen in research being done by Kiatpongsan & Norton from the Harvard Business School.

In 2014, the duo published an article titled 'How Much (More) Should CEOs Make? A Universal Desire for More Equal Pay' in an academic journal called the Perspectives on Psychological Science.

In the article, the researchers reported data from 40 countries showing where the actual CEO-to-employee pay gap is insanely large and how people drastically underestimate the actual pay inequality.

For example, they showed that in the United States (where underestimation was particularly pronounced), the actual pay ratio of CEOs to front-line employees was about 354-to-1.

That means if an average front-line employee salary is something like $50,000 a year, the CEO is earning $17.7 million that year. The CEO makes the front-line worker’s pay in just one day.

One freaking day.

However, when people were asked to guess the pay ratio between CEOs and front-line staff, they estimated only 30-to-1. That is lower by a factor of more than 10!

Estimated pay ratios were not the only thing the researchers asked their respondents about—they also asked them to share what they thought the ideal pay ratio for CEOs and their employees should be.

The results are telling. Where the estimated pay ratio across all respondents was reported to be 10-to1, the same group of people reported an ideal pay ratio of 4.6-to-1.

And there you have it. The ideal CEO-to-employee pay ratio is not even 5-to-1. That is nearly 50 times lower than the actual practiced pay ratio of 202-to-1.

So, most people not only widely underestimate actual pay gaps, they also work in environments where their desired pay ratios are a galaxy away from what they face in reality.

That seems like a bad formula that could lead to a lot of bad things.

The ideal CEO-to-employee pay ratio is not even 5-to-1. That is nearly 50 times lower than the actual practiced pay ratio of 202-to-1.

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Luckily, there are some exceptions to the rule out there. In fact, our own anecdotal evidence collected during our Bucket List visits even showed that some progressive firms go even more extreme in their equality.

For example, at the Basque ner Group, there is a rule is that the highest-earning 10% can earn no more than 2.3 times the salary of the lowest-earning 10%.

This might sound extreme, but these outliers believe that lower pay gaps are not only fairer for all people involved, they also believe that lower pay gaps are better for the success of their business.

Good for employees. Good for customers.

The belief of these outliers makes total sense. They know that fairness can play a critical role in shaping staff behavior. Besides, Drucker had already said that higher pay gaps would negatively affect staff morale and hurt the overall performance of their business.

However, the level of the pay gap does not only influence the staff of the business. It also influences how customers perceive that same business, as reported by researchers Mohan, Norton & Despandé.

In their 2015 paper titled, 'Paying Up for Fair Pay: Consumers Prefer Firms with Lower CEO-to-Worker Pay Ratios,' they showed that the disclosure of a company’s high pay ratio (e.g., 1000-to-1) reduces purchase intention relative to firms with lower ratios (e.g., 5-to-1). The researchers also showed that lower pay gaps actually increase ratings from customers of that business.

Two for the price of one

"It should be clear now,” we told the CEO. "Establishing fairer pay gaps means hitting two targets with one shot. Yes, it will boost your staff's morale; that’s for certain. But voluntarily disclosing this information to the world will also give your business a way to gain favorable perceptions from consumers."

And that's all we have to say. For now.

What's The Ideal CEO-to-Employee Pay Ratio? It's Much Lower Than You Think

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Are you eager to learn more about Basque ner Group and other progressive firms? Are you keen to know what you can learn from these companies to become progressive yourself?

Well then, you should definitely check out the 6-week course on our Corporate Rebels Academy.

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