The Rock Center for Corporate Governance at Stanford University has released the results of a recent, nationwide survey of 1,202 individuals to better understand public perception regarding CEO pay levels among the 500 largest publicly traded corporations. The news for those CEOs is not good.
“There is a clear sense among the American public that CEOs are taking home much more in compensation than they deserve,” Professor David Larcker says of the results. “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.”
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 survey found. While the typical respondent believed a CEO earns roughly $1 million in pay, the median reported compensation for the CEOs of these companies is approximately $10.3 million, with an average of $12.2 million.
The survey also found that 74 percent of respondents believe CEOs are not paid the correct amount relative to the average worker (only 16 percent believe that they are). While responses vary by political affiliation, they remain largely negative: only 25 percent of Republicans who participated 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 the respondents believe there is a maximum amount that CEOs should be paid relative to the average worker, regardless of the company and its performance. A majority of all political groups believe CEO pay should be capped in some manner, though Republicans are somewhat less likely to hold this opinion (52 percent) than Democrats (66 percent) or Independents (64 percent).
Those who believe in capping CEO pay relative to the average worker would do so at a very low multiple. The typical American would limit CEO pay to no more than 6 times that of the average worker. These figures are significantly below current pay multiples, which are approximately 210 times based on recent compensation figures.
Public opinion varied widely about the degree to which executives should share in the value created at a company. For example, when respondents were given a hypothetical situation in which a company’s value increases by $100 million over the course of a year, the median respondent said the CEO should receive only 0.5 percent ($500,000) as compensation.
“This gets to the heart of the issue of ‘pay for performance,’” says Nick Donatiello, a lecturer in corporate governance at the Stanford Graduate School of Business. “Either the public is not sold on the idea that CEOs should share in value creation to the extent that they do. Or they do not believe that CEOs play an important role in value creation. Clearly companies need to make a stronger case for how pay is tied to performance—to the extent it is.”
A large majority (70 percent) concurred that CEO compensation is a problem, compared with only 18 percent who do not. The view that CEO pay is a problem is substantially more prevalent among those who identify themselves as Democrats (78 percent) and Independents (72 percent) than those who identify themselves as Republicans (54 percent). Low income respondents were less likely to believe that CEO pay is a problem (54 percent) than high income respondents (72 percent).
In terms of a solution, approximately half of respondents believe the government should do something to change current CEO pay practices, approximately one-third do not believe the government should intervene, while the remainder have no opinion.
Higher income respondents (38 percent) were much less likely to favor government intervention than middle income (55 percent) and lower income (52 percent) participants. Republicans and Independents (36 percent and 47 percent, respectively) are also less likely to favor government intervention than Democrats (60 percent).
Twenty-eight percent of respondents who advocate government intervention would substantially increase taxes on CEO compensation above a certain amount; 25 percent would set a strict limit on the dollar amount a CEO can receive relative to the average worker; 17 percent would limit the absolute dollar amount that a CEO can receive; 17 percent would require more performance-based compensation; 9 percent would ban the use of stock options in executive compensation contracts; and 8 percent would ban the use of all equity compensation in CEO pay packages.
“Corporations and their boards need to do a better job explaining and justifying CEO pay arrangements,” Donatiello says. “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.”