3 Ways to Address the Salary Chasm Between CEOs and Employees
The difference in pay between CEOs and other employees has become a controversial topic that has become even more heated in the light of new data. In August, Glassdoor released a report showing the average CEO earns 204 times as much as median worker pay.
This may be shocking, or even discouraging, to employees who believe they work about as hard and as much as upper management. With the SEC enforcing companies to reveal pay gaps in 2017, how will organizations keep employees satisfied in the wake of this information?
What does the pay gap look like?
Looking at the Glassdoor data, the pay gap looks pretty bleak. Among the large, publicly-traded companies included in the report, the average CEO salary was $13.8 million per year, while the average pay for middle-skilled workers was $77,800.
Discovery Communications had the largest pay gap -- the CEO makes 1,951 times what median workers do. The CEO-to-worker pay ratios of Chipotle, CVS Health, Walmart, and Target followed close behind. Target is the only company in the top five whose ratio falls below 1,000 at 939.
While these ratios are absurd, there are companies at the other end of the pay gap spectrum. Fossil had the lowest ratio considering their CEO reported $0 in compensation in 2014. Google and Kinder Morgan followed, as their CEOs took home salaries of $1. Symantec and Urban Outfitters finished out the five lowest ratios, as their CEOs both earned three times what their median employees did.
This analysis only included a small sample of large companies on the S&P 500, however, and CEOs of smaller companies may earn much less. In fact, 2014 data from the Bureau of Labor Statistics found that the average annual salary for CEOs in the U.S. is $180,700.
Despite these more modest earnings, workers around the world think the pay gap between CEOs and their employees should be much less, a 2014 study published in Perspectives on Psychological Science found.
Researchers from Harvard University surveyed more than 55,000 workers from 40 countries about the ideal pay ratio between CEOs and unskilled workers, and the average response was 4.6 to 1. In the U.S., the average ideal ratio cited by workers was 6.7 to 1.
Although workers are calling for change, CEOs have been earning salaries significantly above these ideal ratios for decades, and it’s only gotten worse with time. In 1965, CEOs made 24 times more than the average employee, data from the State of Working America shows. In 1980, the ratio increased to 40 to 1, steadily increasing each year. From 1978 to 2011, the salaries of CEOs grew more than 725 percent.
The pay gap will never improve unless organizations take a stand to make wages more fair. Here are a few things companies can do to decrease the pay gap and keep their employees happy:
1. Cap executive salaries.
Eliminating the pay gap altogether may not possible for some companies, but instituting a salary cap can keep the gap from growing wider.
Whole Foods has capped salaries for their top executives for more than 20 years. Originally, the salary cap ratio was set at 8 to 1, but as the company has grown, so has the salary cap to 19 to 1. That means the maximum cash compensation anyone can make with the company is about $650,000. The cap is low enough to satisfy their lower-level employees but still competitive enough to keep their key executives from leaving.
Capping salaries shows employees at every level that the organization values and cares about them. In fact, 40 percent of U.S. and Canadian employees surveyed by Virgin Pulse this year said they wished their employers cared more about their financial well-being.
In addition, employees who feel valued by their employers are more likely to be satisfied by their job, a 2014 survey conducted by the American Psychological Association found.
Capping salaries shows all employees that their skills and work are valued and important to the company.
2. Be transparent.
New rules by the SEC will require public companies to disclose the ratio of CEO pay to median worker pay in 2017, but employers should start being transparent about salaries before then.
Buffer has adopted a policy of transparent salaries since 2013. Anyone can view the salary of any employee for the company. Not only does the company share the numbers for every employee, it also shares the formula it uses to determine those salaries.
This transparency allows employees to see the possibility for growth within the company. The numbers and formula open the door for employees to have meaningful conversations about what they need to do to increase their salaries. With a clear idea of how to boost their salary and position, employees are more motivated to do so.
Offer opportunities for upward mobility and raises and tell employees exactly what they need to do to achieve them.
3. Invest in learning and development.
Low-skilled workers will earn less than experienced ones, but employers can offer training and development to increase their worth. And employees are eager for these opportunities.
A survey of more than 200,000 employees conducted by TinyPulse in 2014 found that 66 percent of employees feel their current employer doesn’t provide enough opportunities for growth or professional development.
Instead of (or in addition to) rewarding employees with higher salaries, consider compensating them with education and professional development. Pay for courses, advanced degrees, and invest in other programs to grow the knowledge and skills of employees.
More skills means more opportunities and, ultimately, more money for workers. Emphasize the value of professional development with tools like YouWorth that calculate how much professionals are worth based on their skills, education, and work history.
Education is important and valuable to professionals as it increases their worth, drives their growth, and enhance their career.