CEOs, Salaries, and Business School

CEOs, Salaries, and Business School

Anyone who isn’t in the top 1% of wealthy Americans has heard it–discontent about the inflated salaries of CEOs around the country. Income inequality is hotly debated, and CEOs seem to be at the forefront of the discussion. But how much should these heads of company be taking home?

While we’re quick to complain about the wage of the worker versus the wage of the executive, we rarely offer another solution. Exactly how much should these CEOs be making?

Michael Norton, of Harvard Business School, and Sorapop Kiatpongsan of Chulalongkorn University, recently studied the wage gaps people desire . They studied the consistency of their expectations among people from a variety of countries and backgrounds. Their research revealed that, for the most part, individuals share ideas about how much exactly CEOs should be making.

The research, will be published soon in Perspectives on Psychological Science, also revealed that people are underestimating the amount CEOs are making–CEOs are making much more than we think they deserve. Across all countries, the most ideal pay ratio for CEOs to unskilled workers was 4.6 to 1–the estimated ratio was 10 to 1.

In the United States, the average CEO makes an annual salary of $12,259,894 while the average worker makes only $34,645. At the ideal ratio, a worker would be making $1,838,975.  That, as you likely noticed, is a huge difference.

Income level, political leaning, etc all had very little to do with our decisions. Universally, we all agree that the ideal gap is significantly smaller than what we see happening. But we’re still not sure how big that gap is when asked to guess. The researchers suggest that this may be a reason for the lack of protest–the reason all of us aren’t protesting and demanding pay that is more fair.

Overall, there seems to be a general lack of information on the wage gap–and perhaps it is making us complacent.

A little skepticism

A report out of Harvard Business School indicates that, despite an economy on the rise and huge corporate profits, leaders in business aren’t convinced they’ll be able to compete abroad. They’re skeptical that pay will increase and they doubt that the conditions of American workers will improve. Suffice it to say, they’re downright pessimistic.

Harvard professor Michael Porter coauthored the research and notes that businesses and highly skilled workers continue to thrive in an economy where middle and working class employees continue to struggle.

And Porter had some recommendations–namely, ask business leaders to be directly involved in efforts to improve things for workers. He suggested additional training and education programs, which will benefit individual workers while positively influencing the company’s ability to compete in a global marketplace.

The key, he says, is in finding a solution that is mutually beneficial. When an individual succeeds, so does the company. While CEO pay may be inflated, heads of businesses certainly don’t want to be viewed negatively, as people who profit at the expense of workers within the company. Porter’s co author is Jan Rivikin who is also a professor at Harvard Business School.

The report, which is titled “An Economy Doing Half Its Job” surveyed approximately 2,000 Harvard Business School alumni and asked participants to make observations about their own businesses as well as their outlook on a global economy. While the study didn’t necessarily reveal anything we didn’t know, the stagnation of worker wages is nonetheless troubling.

The researchers want to call light to another aspect of the study–those survey are graduates of an extremely prestigious business school and hold very important positions. 40% of them are chief executives, managing directors, and founders of their workplace. They’re the guys and gals in charge, and only 27% think that American workers will receive higher wages in three years. But it is even more troubling–41% think workers will actually be receiving less.

Those surveyed were more optimistic about how companies would do–which is strange, since company well being is often tied to employee satisfaction. Someone has to do the work that’s making the businesses successful.

The researchers insist that the answer is in job training and education programs to increase the skill level of all workers which will, as a consequence, lead to higher wages.

So if the salary-inflated folks at the top aren’t optimistic about the future of the American worker, what then?

It starts at school

Recently, Robert Reich, former secretary of labor, called upon Harvard Business School to change the way they’re educating future CEOs. He argued that it begins with the education these men and women are receiving and filters down to the American worker.

Reich asked professors to consider the very human costs of educating a class of business leaders who are unwilling to put the worker before the investor and ultimately, themselves.

“So it would seem worthwhile for the faculty and students of Harvard Business School, as well as those at every other major business school in America, to assess this transformation, and ask whether maximizing shareholder value – a convenient goal now that so many CEOs are paid with stock options – continues to be the proper goal for the modern corporation,” he writes.

Reich acknowledges the talented minds coming out of Harvard Business School (and many others), as well as their ability to gain leadership positions. He recognizes the great investment they’ve made in their education and the resource they present. And then he calls the school out–

“But given that so few in our society – or even in other advanced nations – have shared in the benefits of what our largest corporations and Wall Street entities have achieved, it must be asked whether the social return on such an investment has been worth it, and whether these graduates are making the most of their capacities in terms of their potential for improving human well-being.”

Reich isn’t wrong–we’d all be wise to think about the human cost of doing business. But we’ve got to do more than that. We’ve got to work to decrease the wage gap, even if it means Harvard Business School graduates have to take a bit of a pay cut.

 photo credit: UN Women Gallery via photopincc

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The Young Wealth Team