CEO pay — The rewards of power

By Harry Garretsen and Janka Stoker *

(exechange) — May 1, 2019 — CEO pay is on the rise. For the U.S., CEO-to-worker compensation ratio in 1965 was 20 to 1, but has risen to a staggering 312 to 1 in 2017 (1). Literature shows that CEO pay is typically not related to firm performance.

When selecting CEOs, boards only have limited information about their qualities. Once in the saddle, CEOs have the discretion to pursue their own interests.

Also, new research by Australian scholars (2) shows that a pay gap between the CEO and the shop floor has negative effects on the motivation of workers.

So there is every reason to be critical about the current trend in CEO pay.

But change is unlikely to come from within.

The solution lies in organizing countervailing power at all levels: within firms by giving more and different stakeholders a greater voice, and also by external pressure from customers, unions and legislation.

Rising CEO pay seems to be mainly the result of a shift in power. Restoring the balance of power is therefore crucial, not only for employees but also for firms and their shareholders.



* The writers are professors at the University of Groningen.

Editor’s note: This is a guest post.