Are CEOs Worth 351 Times the Median Pay? Shared Values, not Share Values
Are CEOs worth 351 times the median pay? American CEOs made 351 times more than a typical worker in 2020, but in 1965 it was only 15 to one. Was life miserable back then? It’s not as though we have got it all right now. In 2021, the US was ranked 20th in the world in quality of life, sandwiched between Spain and Portugal. Such huge discrepancies will not lead to the organization having shared values.
Shared Values, not Share Values
Whatever economic and corporate pundits may claim about the CEO’s value to the corporation, morally it’s indefensible for such a difference in remuneration. Morality is about right and wrong. It cannot be right for one person to be valued 351 times more than another, especially when so often when that remuneration is based on share value, not shared values.
Espoused values of corporations can be very deceptive. They may sound good to unwitting publics on TV ads, but if the reality is that the boss is committed to boosting the stock price because her income depends upon it, then claims about other behaviors will ring a bit hollow. Especially so when it involves share buy-backs, adding nothing of value to other stakeholders.
Purpose Leads to Profits
On the other hand, “When an enterprise is run with the primary purpose of creating value for society, it isn’t sacrificing profits… instead it expands the total value that it creates,” according to Alex Edmans, Professor of Finance at London Business School. Based on much research, he shows that doing well by doing good actually works for all stakeholders, not just the top.
Linking CEO pay to the creation of shared value rather than share value is beginning to happen. According to Perillon, a creator of ‘environmental dashboards, 89% of investors agree the inclusion of sustainability metrics, for example, is important in both annual and long-term executive incentive plans, while 88% of consumers will be more loyal to a company that supports social or environmental issues.
Corporate Behavior May Be Changing, but Morality Is Far Behind
The problem is that progressive as such initiatives are, they indicate no change in moral values as indicated by the 351:1 pay ratio. Berkshire Hathaway, Warren Buffet’s company is not a common example with a minimal ratio of 2:1. Remember, though, that minuscule stock price increases can net him millions.
Pay is not the only aspect of the relationship of an employee to her employer. Management behavior, benefits, policies and many other characteristics impact value. Top management has to demonstrate espoused commitments to shared values.
If senior executives get big stock options they have two negative impacts on everyone else. First, because they don’t get the dollars unless they sell; second, because the temptation for the C-Suite is to take self-interested decisions that will boost the share price. Here too, Alex Edmans, cited above, has suggested it would be legitimate to tax share buybacks that add no value to the company nor the majority of its stakeholders.
The morality of huge differences of take home pay remains. Naturally the circumstances of the startup business are very different to the established multinational. However, moral standards apply to both, whatever the size.
Entrepreneurs Have an Advantage
The entrepreneur has an advantage over the CEO of a huge corporation: scale.
It is nigh impossible for a startup to have a founder to worker pay ratio of 351:1. People are just too close. On the other hand, she can determine a principle of how great a spread she will have in her business. She can also think about the distribution of equity, not only among co-founders, but among any people who join the company, using an ESOP for example. Benefits will convey a big message about moral attitudes.
The startup’s structure will be a factor too. Will it be a partnership, an LLC, a LC3, a Benefit Corporation, a cooperative? Governance will significantly determine behavior and relationships, especially in smaller enterprises. Even more so, if the new venture aims to achieve BCorp status, the process of becoming a BCorp will require the founder to consider all stakeholders, and high on the list will be employees.
George Packer, author of the 2021 book, Last Best Hope: America in Crisis and Renewal, says “Inequality undermined the common faith that Americans need to create a successful multi-everything democracy.” He added, “the core phenomenon of 2020 was the failure of solidarity.”
The word ‘solidarity’ is not on everyone’s lips. However, society works best with solidarity. Even for those us that are characterized as self-sufficient, the plain fact is that we are all interdependent. We depend upon one another. Our lights only stay on at home if someone else is making that happen.
The interdependence of people in society is like an ecosystem in nature. Self-interested ego-systems ultimately lead to social collapse, in the same way as unbalanced eco-systems.
Mandate for Morality
There is no way that governments or any public authorities can mandate moral behavior. During the Covid pandemic there was significant push-back and non-compliance, so far as the mask and vaccination mandates are concerned.
The responsibility for the immorality of high pay ratios does lie with the leadership of enterprises. Whether startup founder or CEO, she is uniquely positioned to demonstrate moral responsibility through setting a limit on pay disparity. Founders can learn from corporate deceit and ensure that their behaviors match purpose.
CEO pay in 2020: https://www.epi.org/publication/ceo-pay-in-2020/. The nonprofit, nonpartisan Economic Policy Institute’s mission is to inform and empower individuals to seek solutions that ensure broadly shared prosperity and opportunity.
Quality of Life Rankings: https://www.usnews.com/news/best-countries/quality-of-life-rankings.
Alex Edmans: https://www.growthepie.net/.