Overpaid CEOs Get Ranked Lower By Employees

Editors' pick: Originally published Oct. 24.

CEOs who receive higher levels of salaries tend to be ranked lower by their employees who are also concerned about the balance between the amount of work they perform and their lifestyles.

When CEOs receive higher salaries and bonuses, their approval ratings decline, according to the study conducted by Glassdoor, a Mill Valley, Calif.-based employment website which includes reviews from former employees. Previous research demonstrates that CEOs earn 204 times the median pay of their employees on average.

Equity theory in academic research proposes that employees judge the fairness of their compensation as it measures to their contribution, said Karen Ehrhart, an associate management professor at San Diego State University.

"They compare their own contributions and outcomes to someone else's contributions and outcomes and they determine whether there is fairness," she said. "If an employee knows or believes that he/she is making less money than another employee, that might still be perceived as fair if the comparison person contributes more to the organization."

The majority of students at San Diego State University are employed either part-time or full-time, and they believe equally that it is both fair and unfair that CEO pay is so much higher than lower level employees.

"Students who say it's fair argue that CEOs have a great deal of responsibility and contribute a great deal to the organization compared to employees and because CEOs contribute more, then they should receive more compensation as a result," she said.

The students who believe it is unfair discuss the issue of "how much more" the CEOs should get paid, Ehrhart said. 

"CEOs should get paid more than lower level employees, but perhaps not as much as CEOs currently make," she said.

The analysis included 690 CEOs at publicly traded U.S. companies. This effect is diminished slightly when the company culture such as how senior leadership is viewed, availability of career opportunities and quality of compensation and benefits is perceived as being strong.

One surprising result is that employees give higher CEO approval even when their work and life balance is lowered and could be willing to exchange it for work they believe in. The correlation is negative and the research found that out of a 5-star ranking, even if a company lost one from because of its work-life balance, it resulted in a 2.9% increase in CEO approval rating.

"Though we know work-life balance is important to many employees, this research suggests that employees are willing to make a trade-off in work-life balance to work under a visionary leader," said Andrew Chamberlain, chief economist of Glassdoor.

The gender of the CEO, the person's education level and number of years working at the company have no impact on approval ratings, the study found. However, employees do take into account if a company is performing well and the CEOs of companies which were more profitable received better ratings.

Employees place a higher priority on how much salary a CEO receives especially when layoffs occur from poor company performance, said Jay Meschke, president of human capital services for CBIZ, an Independence, Ohio-based business services company.

"Wise CEOs diffuse potentially negative pr by cutting their own compensation or taking other tangible and intangible actions that demonstrate that they will participate in the pain," he said.

Worker satisfaction, culture and turnover is impacted and can suffer based on a CEO's compensation, Meschke said.

"If employees do not feel the CEO is acting as a fiduciary steward regarding their personal compensation or other perquisites, it can weaken or break a feeling of trust with employees," he said. "If employees see the CEO being reckless with his/her compensation at the expense or detriment of the employees, turnover may result unless employees feel well compensated themselves."

When employees are reaping the rewards a company's profit and receiving bonuses, they "rarely take pot shots at the CEO's compensation," said Umesh Ramakrishnan, senior partner at Kingsley Gate Partners, a Dallas-based executive search firm.

"This is directly proportional to the current state of the company," he said. "If the company is in a very good financial situation and the employees are reaping the fruits of that success through employment growth and wage growth, employees are happy and productive."

During downturns, especially if the future projections of the company appear bleak, then it becomes a "lightning rod for discontent," Ramakrishnan said. Dissatisfaction also emerges on the cash portion of a CEO's salary.

"Employees quibble less about the performance-based portion of the compensation and more about the base salary and perks," he said. "One way that companies deal with this issue during a down cycle is by reducing the CEO's salary to $1 and putting in an incentive plan to drive a turnaround."

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