In 1933, the U.S. government asked 2,000 corporations listed on stock exchanges in New York to disclose how much they paid their top bosses — its first effort at making the pay of executives more visible. The idea was to encourage the “more conservative management of industry,” The New York Times reported when it published some of the results on its front page.
But this new publicity did not temper pay. Instead, according to a study by Alexandre Mas, a Princeton economist, the opposite happened: Average chief executive compensation rose, mostly because the lower-paid executives — now realizing that they were, indeed, lower-paid — pushed for raises that brought their compensation in line with their higher-paid peers’.
Nonetheless, the belief that revealing chief executive pay would help keep executive compensation in check stuck around, and got more complex. In 2018, the Securities and Exchange Commission required companies to publish not only executive pay, but also a ratio that describes how the pay of a company’s leader compared with the pay of its median worker.
This new take on pay transparency has been at least as ineffective at moderating chief executive pay as the 1933 version: Last year, the median pay for chief executives who were in their jobs for at least two years was $14.8 million, or 186 times the median employee’s pay, according to Equilar, which collects corporate leadership data.
One reason it may not have started a revolution? Employees already understood that executives were paid exorbitantly and how their own paycheck compared with that.
The people who learned the most were not people working at the companies, but outside observers. “It was news to investors because investors didn’t have their own pay to make a ratio of,” said Lisa LaViers, an assistant professor at Tulane University’s Freeman School of Business who has studied how disclosing the pay gap affects workers. But, she said, “This is not informative in the same way to employees.”
The gap between worker and chief executive pay may also not tell employees much about how fairly they’re being paid, said Ethan Rouen, an assistant professor at Harvard Business School whose paper published by The Accounting Review concluded that the ratio wasn’t a good proxy for fairness throughout a company.
Mr. Rouen’s study looked at how companies’ performance related to the ratio of pay between median workers and the company’s leader.
There are two schools of thought when it comes to how workers understand their pay in relation to that of their bosses. One, known as Tournament Theory, suggests that when pay is fair, workers will be motivated to put in more effort if there is more disparity, which means a bigger prize for climbing the corporate ladder. The other, known as Equity Theory, suggests that pay gaps perceived as unfair build resentment and lead to poorer performance. Both theories suggest that if pay is fair, workers should be better at their jobs.
If the ratio of worker pay to chief executive pay were a good indicator of fairness throughout the company, Mr. Rouen would have expected to see that firms with lower ratios performed better. Instead, he saw no significant difference between them.
He did, however, find a relationship based on whether the pay of both workers and executives was set fairly. Those with fairer pay, as determined by economic factors examined by Mr. Rouen, performed better.
For employees, the part of the ratio that gets less attention — median worker pay — may be more important than seeing what the top boss makes, Ms. LaViers said.
In a recent working paper, she and co-authors Mary Ellen Carter at Boston College, Jason Sandvik at The University of Arizona and Da Xu at Tsinghua University used data from the employer review site Glassdoor to analyze how employees responded when the requirement for companies to disclose the ratio of chief executive to worker pay first went into effect.
They found that worker satisfaction with pay improved, most likely because workers tend to overestimate how much their peers make. In other words, they’d expected median pay to be higher, and their own salary to fall lower in the hierarchy.
“The accurate number may have been lower,” Ms. LaViers said. “And so as a result, they were happier with their own pay.”
What matters most to employees seems to be not what company leaders make, but whether they believe that it — and their own pay — is fair.
The S.E.C. has tried to add some context about fairness to executive pay disclosures with a requirement to show financial performance for up to five years alongside pay information that goes into effect this year.
Some researchers and investors argue fairness may be better gauged with more information about employees, rather than about executives.
Last year, a group of law and accounting professors, including Mr. Rouen, sent a letter to the S.E.C. proposing more disclosures about investments in labor, including their total compensation, turnover numbers and how many workers are employees or contractors.
“Investors absolutely care about how or about the quality of the workplace,” said Cambria Allen-Ratzlaff, the co-chair of a coalition of investment managers that pushes for these disclosures.
Focusing on more transparency about rank-and-file pay may also better serve the goal of reducing inequality, Mr. Rouen said. Chief executive pay is not necessarily the problem, he argues. “It’s the fact that wages have remained stagnant, that worker power has diminished over time, that the federal minimum wage has remained at $7.25” since 2009.
“It boggles my mind,” he said, “that we spend so much time disclosing information about C.E.O. pay and so little about the employee pay.”
