What is a fair CEO wage? Expectations Vs reality

Some would argue the absurd remuneration of top level company managers is the root cause of many of the economic issues we are seeing today. But data shows just how out of hand it has become.

Using a ratio that compares wages of the average CEO versus the average unskilled worker, a study from 2014 was able to quantify the incredible gap between what people believe the ratio should be, what they expect it probably is, and what it actually is.

The results were startling. Just taking the U.S. as an example. Respondents showed they believe the ideal CEO should be paid 7x the amount paid to the average unskilled worker. They then answered that they expected the true number to be 30x.

People know CEO’s earn an incredibly high amount, and 30x is a very high number, but what I don’t think even the researchers could have predicted, is just how far off the mark these expectations were. The actual ratio for U.S. CEOs is 345x.

To put that number in perspective, at the time of the report the average annual wage for an unskilled worker was US$34,645, meaning the respondents believed at the ideal ratio, CEOs should be earning around US$242,000. Yet the true average CEO pay packet was around $12 million.

It is well documented how the US economy values high-level management, which is no surprise that the US should be at the extreme end of the spectrum. But to compare with the total average, the result was not much of an outlier when it comes to the difference between expected and actual:

Total averages (40 countries)

• Ideal ratio = 4.6x
• Expected ratio = 10x
• Actual ratio = 101x

There were some further interesting results from other countries, with us Australians coming off as one of the most tolerant to high CEO remuneration, with an ideal ratio of 8.3x, the highest of the 16 countries surveyed with data available to compare against.

To me, these numbers show the inequality between regular workers and the lucky few able to reach the top has grown to an outlandish level. Does anyone really believe a CEO makes a difference to a given company’s performance at a rate of 345:1 when compared to a normal worker? 

Perhaps instead of the stock standard interest rate cuts desperately attempting to save us from a recession, the simplest answer might be to focus on this problem and try to bridge the gap between what the majority believe is fair and what’s really happening out there.