Report: Big differences between workers’, CEOs’ pay can hurt profit

In the hotel industry, labor costs average roughly 50 percent of total operating expenses, prompting hotel operators to get creative.
The public is getting a better look at pay ranges at publicly traded companies, thanks to a tax reform requirement. (jansucko/iStock)

Pay discrepancies are not a new topic, but a new study shows that companies with closer CEO-to-worker pay ratios may generate higher profit per worker.

The public is getting a better look at pay ranges at publicly traded companies, thanks to tax reform that became law at the end of last year. Such businesses have had to disclose CEO pay for decades, but this year they had to disclose their median workers' pay and the ratio between that and the CEO’s rate. CNBC analyzed that newly available data.

For instance, the pay ratio is on the high end at retailer Kohl’s, at 1,264, while Realty Income Corp.’s is 88. Several factors should be considered, according to an article about the study, published May 13. For instance, “the ratios can vary depending on factors like the company’s size, geographic distribution and percentage of part-time or seasonal workers. Companies also make decisions in how they calculate the ratio that affect the final outcome.”

Although the numbers will likely have little effect on investors, the article states, “most shareholders probably hope that most employees don’t see this information,” Ethan Rouen, an assistant professor at Harvard Business School, said in the article.

“Nobody expects to make as much as the CEO, but they expect to be paid fairly,” Rouen said. When that doesn’t happen, workers could resign or simply underperform.

Supporters of the new transparency say it should jump-start conversations that will boost workers’ pay and stem executives’ traditionally steep compensation.

In fact, CEOs have long battled a reputation of earning more than their performance dictates they should, and recent analysis by The Wall Street Journal of data from MyLogIQ and Institutional Shareholder Services supports that trend.

Among S&P 500 CEOs who got raises in 2017, the 10% who received the biggest increases scored – as a groupin the middle in terms of shareholder return, according to a May 14 article about the study. Along the same lines, the 10% of companies that had the best returns to shareholders scored in the middle in terms of CEO pay.

One reason for this inconsistency is that boards typically set CEO pay by benchmarking the average compensation for leaders at a peer group of companies, Herman Aguinis, a professor of management at George Washington University School of Business, told The Wall Street Journal. That works well when CEO performance doesn’t vary, Aguinis co-wrote in a report published last week in the journal Management Research, but it does varygreatly.

That study found almost no overlap between the top 1% of CEOs in terms of performance and the top 1% of earners, while only a fifth of the top 10% of performers were also in the top 10% for pay.