Most people think CEOs are paid too much

Tim Cook, CEO of Apple Inc,
attends the 2013 Allen & Co conference.

It’s often assumed that a desire to reduce income inequality is held only by people on lower pay, or by those who endorse left-wing views. However, a new study of over 55,000 people (average age 47; 55 per cent were female) across 40 countries on 6 continents finds a universal desire to reduce the gap between the highest and lowest paid workers. The authors, Sorapop Kiatpongsan and Michael Norton, say their results “offer guidance to policy makers seeking to understand lay attitudes toward income inequality.”

The research was based on an international survey that asked people to estimate the pay of a typical CEO in their country, a cabinet minister in government, and an unskilled worker. Participants then stated what the ideal pay for these three groups should be. The average estimated pay ratio of CEOs to unskilled workers was 10 (i.e. people thought that CEOs were paid ten times more than unskilled workers), while the average ideal ratio was 4.6. There was significant variation between countries, but a large gap between estimated and ideal pay ratios was found everywhere and across all demographic groups regardless of participants’ own pay, their education or political affiliation.

The data for estimated and ideal cabinet minister pay showed similar patterns – people across all nations felt that senior politicians should be paid less than CEOs and more than unskilled workers, but they believed the pay gaps between these groups should be much smaller.

For 16 countries including many European nations, Australia, Japan and the US, the researchers also had access to data on actual pay ratios for CEOs and workers. This showed that not only did people in all these countries wish for pay gaps to be smaller than they thought they were, they also massively underestimated the size of the real pay gaps. For example, in the USA, participants estimated the ratio of CEO to unskilled worker pay to be 29.6, but in fact the real ratio is 354.

The Harvard Business Review have further unpacked these data. Focusing on the UK, participants thought the average ratio between CEO and unskilled worker pay should be 5.3. In fact it is 84: that is, based on 2012 figures, the average CEO in the UK earned $3,758,412 per year, while the average worker earned $44,473. If CEO pay was held constant and worker pay was increased to reach participants’ ideal pay gap, then average worker pay per year would become $704,707.

Kiatpongsan and Norton said that pay gaps are unlikely to reduce any time soon to the ideal levels expressed by the participants in this study, but they said there are promising signs. For example, there are increasing calls in some countries for pay ratios between company CEOs and workers to be made transparent. Meanwhile, in Switzerland, the Social Democratic Party recently submitted a large petition calling for the pay ratio of CEOs to the lowest paid workers to be capped at 12. However, the researchers also warned of hurdles ahead. The ice cream company Ben and Jerry’s tried to enforce a 5 to 1 pay ratio between CEOs and low-paid workers, but had to abandon the policy in 1995 when they failed to recruit a new CEO.

_________________________________ ResearchBlogging.org

Sorapop Kiatpongsan and Michael I. Norton (2014). How Much (More) Should CEOs Make? A Universal Desire for More Equal Pay Perspectives on Psychological Science

Post written by Christian Jarrett (@psych_writer) for the BPS Research Digest.

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