Americans and CEO Pay: 2016 Public Perception Survey on CEO Compensation
By
David F. Larcker,
Nicholas E. Donatiello, Brian Tayan
CGRI Survey Series. Corporate Governance Research Initiative, Stanford Rock Center for Corporate Governance, February
2016
Accounting,
Corporate Governance
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Recently, the Rock Center for Corporate Governance at Stanford University conducted a nationwide survey of 1,202 individuals — representative by gender, race, age, political affiliation, household income, and state residence — to understand public perception of CEO pay levels among the 500 largest publicly traded corporations. Key takeaways are:
- CEOs are vastly overpaid, according to most Americans
- Most support drastic reductions
- The public is divided on government intervention
74 percent of Americans believe that CEOs are not paid the correct amount relative to the average worker. Only 16 percent believe that they are. While responses vary across demographic groups (e.g., political affiliation and household income), overall sentiment regarding CEO pay remains highly negative.
“There is a clear sense among the American public that CEOs are taking home much more in compensation than they deserve,” says Professor David F. Larcker of Stanford Graduate School of Business. “While we find that members of the public are not particularly knowledgeable about how much CEOs actually make in annual pay, there is a general sense of outrage fueled in part by the political environment.”
“Corporations and their boards need to do a better job explaining and justifying CEO pay arrangements,” adds Nick Donatiello, Lecturer in Corporate Governance at Stanford Graduate School of Business. “The vast majority of Americans think CEO pay levels are a problem. Some are comfortable with the idea that CEOs should substantially share in any upside value they create, while many others favor significant reductions in the amount of pay a CEO can receive relative to the average worker. Clearly companies have not been successful communicating how much value their CEO creates and how much compensation is required, given the market for talent, to attract and motivate the right people.”
According to Brian Tayan, researcher at Stanford Graduate School of Business, “Whether high pay packages are deserved is an emotionally charged subject. Whether the government can or should intervene is even more divisive. Public consensus is that there is a problem. There is much less agreement on a solution.”
The controversy over CEO compensation has reached new heights with labor unions, media, and political candidates from both major parties expressing public criticism. According to Democratic candidate Hillary Clinton, the average CEO “is now earning 200 times the average hourly wage. Twenty years ago the ratio was about forty times. People all over this country are really upset about this.” According to Republican candidate Donald Trump, CEO compensation is a “total and complete joke…. they get whatever they want.” On its website, the AFL-CIO cites a CEO-to-worker pay ratio of 331:1, adding that “in recent decades, corporate CEOs have been taking a greater share of the economic pie while wages have stagnated and unemployment remains high.” A Bloomberg report claims that “the gap between pay for U.S. chief executive officers and the people who work for them has widened sevenfold in three decades. Are bosses seven times smarter these days? Company boards seem to think so.”1
The findings include the following:
The Average American Grossly Underestimates How Much CEOs Make
Public frustration with CEO pay exists despite a public perception that CEOs earn only a fraction of their published compensation amounts. Disclosed CEO pay at Fortune 500 companies is ten times what the average American believes those CEOs earn. The typical American believes a CEO earns $1.0 million in pay (average of $9.3 million), whereas median reported compensation for the CEOs of these companies is approximately $10.3 million (average of $12.2 million).2
Responses vary based on the household income of the respondent, but all groups underestimate actual compensation. Lower income respondents (below $20,000) believe CEOs earn $500,000 ($9.7 million average), while higher income respondents ($150,000 or more) believe CEOs earn $5,000,000 ($14.9 million average).
Still, Americans Believe CEOs Are Overpaid Relative to the Average Worker
The vast majority (74 percent) of Americans believe that CEOs are not paid the correct amount relative to the average worker. Only 16 percent believe that they are paid an appropriate amount. While responses vary by political affiliation, they remain largely negative. Only a quarter (25 percent) of Republicans believe CEOs are paid the correct amount relative to the average worker, compared to 16 percent of Democrats and 11 percent of Independents.
Nearly two-thirds (62 percent) of Americans believe that there is a maximum amount that CEOs should be paid relative to the average worker, regardless of the company and its performance.