How much did your CEO get paid this year? What did any CEO get paid? You may not know the exact amounts, but you probably think the answer is, “Too much.” According to research from 40 countries that probed the thoughts of CEOs, cabinet ministers, and unskilled employees, we all think leaders should be paid less, but we don’t have any specific details about how much they are actually paid. Where we err can be calculated by an organization’s pay ratio, or the ratio between CEO pay and average worker pay. In the United States, for example, the average S&P 500 CEO is paid 354 times what the lowest-ranking employee makes, for a ratio of 354:1 (eight times greater than in the 1950s). Yet U.S. participants in the study estimated that the ratio between CEOs and unskilled workers was only 30:1! Americans are not alone in making this gross underestimate: Participants from Germany, for instance, estimated a ratio of around 18:1 when the actual ratio is closer to 151:1.

In general, people worldwide are unhappy with—and demotivated by—their perception of inequity, even when their estimates of the ratios are far below the reality. Taking the German example further, the ideal ratio of CEO pay to unskilled workers as judged by study participants was around 7:1. To put it all together, then, people think the ratio should be 7:1, believe it is 18:1, and don’t realize it is actually 151:1. For all the countries worldwide in the study, the estimated ratios were above the ideal ratios, meaning participants universally thought CEOs are overpaid. 

Questions 

1. What do you think is the ideal ratio for CEO to worker compensation? Why might the ideal vary from country to country? 

2. How does the executive compensation issue relate to equity theory? How should we determine what is a “fair” level of pay for top executives? 

3. The study found that participants thought performance should be essential or very important in deciding pay. What might be the positive motivational consequences for average employees if CEO pay is tied to performance?