Most Americans think CEO compensation is a problem — but they don't even realize the half of it.
A study from Stanford (Calif.) University's Rock Center for Corporate Governance indicates Americans vastly underestimate how much CEOs at the largest publicly traded organizations earn — yet they still think it's too much.
"There is a clear sense among the American public that CEOs are taking home much more in compensation than they deserve," said David Larcker, PhD, an author of the study and professor of accounting at Stanford Graduate School of Business. "While we find that members of the public are not particularly knowledgeable about how much CEOs actually make in annual pay, there is a general sense of outrage fueled in part by the political environment."
The survey polled a representative sample of 1,202 individuals on CEO pay levels among Fortune 500 companies, and the results showed a large disconnect between perception and reality. When asked how much they believed CEOs make, the median response was $1 million and the average response was $9.3 million. In reality, CEOs of Fortune 500 companies make a median of $10.3 million and an average of $12.2 million, according to the study.
Even while estimating lower compensation, 74 percent of respondents said they believe the CEO to worker pay ratio is not what it should be. About two-thirds felt CEO pay should be capped relative to worker pay, though this opinion was slightly less popular among Republicans than Democrats and Independents.
"CEO compensation figures are much higher than the public is aware of," Dr. Larcker said in the study. "In many parts of the country, it is incomprehensible that anyone can earn this much money. It is understandable that any limit on CEO pay would be low for most citizens."
While most Americans polled agree CEO pay is an issue, they disagree on solutions. About half believe the government should get involved, but ideas of how this should happen vary widely. Opinions are split between increasing taxes on CEO compensation, setting a dollar limit on CEO pay, setting a dollar limit on CEO pay compared to employee pay, banning stock options in compensation contracts, banning equity compensation and requiring compensation to be more performance-based.
Companies should make it more clear how CEO pay is tied to performance, according to author Nicholas Donatiello, president and CEO of Odyssey and a Stanford lecturer. The study shows the median respondent believes, in a hypothetical situation where a company's value grows $100 million, the CEO should receive 0.5 percent as compensation.
"Either the public is not sold on the idea that CEOs should share in value creation to the extent that they do, or they do not believe that CEOs play an important role in value creation," Mr. Donatiello said in the study.
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