Americans have no clue just how much more CEOs make

October 13, 2014, 2:41 PM UTC
Photo courtesy: Joel Sartore Getty Images/National Geographic RF

You have no idea just how much more your boss’ boss’ boss is making compared to you.

According to a study published by Harvard Business Review of 16 mostly European countries, Americans had the greatest disconnect on paycheck totals, believing that top executives make about 30 times more than average workers. Execs actually make about 350 times greater than the rank-and-file worker. Americans also have a greater misperception of the actual chasm in wealth between the poorest and the wealthiest than do people in other countries, according to the survey.

Unlike people who live in other countries, Americans seem “relatively disinterested in differences in pay,” says Lisa Keister, a sociology professor at Duke University. This was underscored by new research that found that people generally fret over inequality, but Americans, more than others, underestimate how vast the gap is between the average worker’s compensation and the wages of top corporate executives.

Figuring out who makes up the wealthiest 1% of Americans—and how they got there—is key to understanding economic inequality and social mobility, Keister says. But little is known about them, she believes, because Americans tend to stick to their own economic class and mingle little with others in different parts of the economic spectrum.

“We tend to spend most of our time with people like us,” she says. That’s called “homophily,” or love of the same, which is the tendency of individuals to associate with those who are similar.

Even those “who are extremely rich or extremely poor,” explains Keister, from her office in Durham, N.C., “spend most of their time in the company of other very rich or very poor people, giving them little reason to think about inequality most of the time.”

Typical manifestations of hyper wealth, such as huge homes, luxury cars and other similar accoutrements, do not impinge on the daily lives of others. But in big cities where people live close together— and differences in wealth are more visible—the income gap may be undeniable and the subject of resentment, but people accept it, notes Bonnie Jacobson, a therapist who sees various strata mix in group therapy sessions she conducts at the New York Institute of Psychology.

“There is envy because some people can fly in private planes, have maids, and own big houses,” Jacobson says, “People do care. They work for banks, for example, and they work hard, but they don’t see the kinds of paychecks that the CEO is getting, and it’s frustrating.

“But a lot of people can get past that,” she believes, “because they often have the feeling they are lucky to be working … they are lucky to have a job.”

Keister, at Duke, agrees. In an article in the Annual Review of Sociology, released in June, she wrote that in addition to not usually facing the country’s economic disparities, “even as inequality worsens, most people have tended to fare better.

“Some segments of the population have fared worse over time, but people are largely faring better than prior generations. This creates individual well-being even in the face of growing inequality.”

The upward mobility of some groups along with the “American ethos that anyone can make it,” has kept people from fully realizing the extent of the wealth gap. Even so, Americans surveyed in the Harvard study agreed with workers in other countries that highly skilled employees are paid too much and lower-skilled workers are being compensated too little.

The disconnect between perception and reality in the United States was highest among the countries studied in the Harvard Business School study. People surveyed in Australia, Chile, South Korea and Taiwan estimated even higher gaps between worker paychecks and the boss’s income, the actual difference in compensation was greatest in the United States because American CEOs are the highest paid in the world, with median compensation of $10.5 million in 2013.

CEO compensation has soared in recent decades, quadrupling from around 30 times the average worker salary in the 1960s to more than 100 times the average in the 1990s. The trajectory has continued relentlessly upward. In the United States today, CEOs earn an average 354 times the amount one worker earns.

The stark division between the haves and have-nots may draw greater public attention once the federal government implements the salary ratio requirement Congress passed in the wake of the 2008 financial meltdown. It requires companies to disclose the ratio between their CEO’s compensation and the salary of a median-earning employee.

Corporations, fearing startling headlines, are fighting the disclosure requirements on the grounds that they set up an unfair comparison between companies, which may use different methods to calculate the ratios. Participants in the Harvard study agreed that the ideal pay ratio for CEOs to unskilled workers was 4.6 to 1, which would result in a U.S. worker making $1.8 million at a company where the CEO makes $12.3 million. Currently, that worker makes $34,645, the study found.

“The lack of awareness of the gap in CEO to unskilled worker pay,” says Michael Norton, a study co-author, “likely reduces citizens’ desire to take action to decrease that gap.”

Despite recent protests by fast-food workers for a higher hourly wage, especially in the restaurant industry, where CEOs have handsome compensation packages, Norton noted that “many of the heated debates about whether CEO pay should be capped or the minimum wage increased are debates based on an extreme lack of knowledge about the true state of affairs.” The data, he argues, “might force people to examine their assumptions.”

At Duke, in the “Getting Rich” course that Lisa Keister teaches, students learn about stocks, bonds, credit, and the practicalities of buying a house, as well as less understood topics like business cycles and the nation’s social and economic stratification.

“They begin to understand wealth and how it is concentrated, and they learn about economic inequality,” she says. But underlining the mixed American attitudes about money and wealth, a noticeable percentage—about 15 %—of her students, she says, choose Wall Street as a first job.

“It’s remarkable,” Keister says, “how many of them go into finance when they graduate.”

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