Updated: Oct 9, 2020
Today many observers and employees are concerned about the gap between CEO salaries and average employee pay. Is it ethical for CEOs to be paid so much more than other employees? Does this practice use a valid reward distribution system? Should companies be considering ways to reduce the gap to improve the overall morale of their employees? Do you think CEO and upper management salaries are subject to ethical consideration? Money is an important motivational factor for employees.
The gap between the pay for the CEO and the average employee is huge, although the CEO carries greater risk and also stands to lose more if the organization fails to achieve its objectives. I am of the opinion that focus should not be placed on the gap alone but also on closing the gap through an upward review of the average employee’s pay, this will improve the morale of the employees and therefore improve their productivity.
Motivation is a word derived from the word ‘Motivate’ which means desires, needs, or wants within the individual. It is the process of stimulating to accomplish goals through actions. In the workplace, one of the factors stimulating people’s behavior is the desire for money. In an organization, the salaries and incentives or bonuses go a long way in motivating the employees to achieve their goals or objectives.
Money satisfies the psychological, social, and security needs of employees. The huge gap between the pay of CEOs and the average employee is demotivating to the staff because it makes them feel underappreciated in the organization. In 2015 U.S. CEOs earned 335 times the pay of the average worker, while in the U.K. they earned 129 times more. This ratio is the number one piece of evidence that CEO pay is excessive and the number one statistic that advocates of pay reform argue should be fixed.
It is unethical for CEOs’ pay to be so high compared to that of the average worker, it is unfair to the workers and causes demoralization. The world’s largest investor, BlackRock, wants to move beyond simply disclosing pay ratios, to capping the ratio of some forms of pay. It wrote to over 300 U.K. companies to say it would only approve salary increases for top executives if worker wages increased by a similar amount. This practice creates an even distribution of reward between the CEO and the workers at the expense of the workers.
Companies should be considering ways to reduce the gap between the CEO’s pay and that of the average worker to boost the morale of their employees. I am of the opinion that the gap should be reduced through increasing the average worker’s pay and if there is going to be an increase in pay of the CEO the same percentage increase should apply to the worker’s pay as well.
The pay ratio is also a misleading statistic because CEOs and workers operate in very different markets, so there is no reason for their pay to be linked — just as a solo singer’s pay bears no relation to a bassist’s pay. This consideration explains why CEO pay has risen much more than worker pay. The size of organizations has gotten bigger due to the global marketplace. Gabaix and Landier show that the six-fold increase in CEO pay since 1980 can be explained by the six-fold increase in firm size. The same argument does not apply to average workers. A CEO’s actions are scalable. For example, if the CEO improves corporate culture, it can be rolled out firm-wide, and thus has a larger effect in a larger firm. In contrast, most employees’ actions are less scalable, only affecting a particular a few machines, a team, a department.
In conclusion, I am of the opinion that the CEO’s pay should not be reduced instead all the other workers’ pay should be increased. This will be a morale booster which will motivate the staff to increase their productivity. Employees really do care about this issue, and a smaller gap makes for greater solidarity, and as a result better performance, throughout the workplace. In closing the gap the distribution will seem fair to all observers and organizations that will implement this will be deemed more ethically inclined in comparison to others that do not adopt this solution.