Gulf Between CEO and Worker Pay Grows Even Wider

Figures tabulated by AFL-CIO. Sources: Business Week, S&P 500 Index, and Bureau of Labor Statistics

Figures tabulated by AFL-CIO. Sources: Business Week, S&P 500 Index, and Bureau of Labor Statistics

354:1. That’s the latest CEO-to-Worker Pay Ratio.

Expressed in dollars, the CEOs of S&P 500 Index companies averaged $12.3 million in total compensation, while wages for workers at these companies averaged $34,645. This according to figures from Executive Paywatch, a compendium of data compiled by the AFL-CIO*.

Great for the CEOs, some say. It’s a free market. The market capitalization of many of these companies is up, as is productivity. Yet, perhaps the issue here isn’t how much the CEOs are paid, but how little the average worker receives for bearing the brunt of that increased productivity.

The late management theorist Peter Drucker recommended a CEO-to-worker ratio of 20:1. Drucker, considered business friendly and the person credited with development of the modern MBA program, believed higher ratios harmed employee morale and therefore long-term productivity and innovation.

“’Widen the pay gap much beyond that, Drucker asserted, and it makes it difficult to foster the kind of teamwork that most businesses require to succeed,’” Rick Wartzman, director of the Drucker Institute, explained in an article for BusinessWeek in 2008 and, more recently, in a letter to the SEC.

Consider how the following facts and figures could impact employee morale:

Since 1978, CEO pay at American firms has risen 725%, more than 127 times faster than worker pay over the same time period, according to data from the Economic Policy Institute.

Also, data suggests that CEOs are rewarded for laying off employees. A 2009 report by the Institute for Policy Studies (albeit a left-leaning think tank) showed that CEOs who reduced their employee ranks by the greatest number, took home 42% more compensation than the year’s average chief executive pay for S&P 500 companies.

Cash reserves at American businesses are the largest in history, while hiring remains stagnant.

To see CEO-to-worker pay ratios for the top 100 Fortune companies, click here.

Certainly, the issues here are many, interwoven, and complex. But the question isn’t should top management be compensated for a job well done, but what harm befalls a company long-term when employees are themselves rewarded so poorly as compared to the corner office.

No, I don’t advocate the government set an arbitrary CEO-to-worker pay ratio. Just the next time workers are told times are tight, they understand top brass isn’t looking at the same set of books when determining their own pay. More often than not, it appears, more money could be made available for raises. So, maybe, armed with that knowledge, workers could apply a little pressure from the bottom up and force profits to be shared more equitably.

*Note: I’m typically distrustful of data published by entities with a vested and/or political interest who might twist numbers to their own ends. In the case of the AFL-CIO, I’m certainly skeptical. However, I vetted many of the numbers listed in Executive Paywatch and found them to be accurate.