Why some think it's fair to pay top CEOs 184 times the average worker salary

Edwin Locke, the world-renowned industrial organizational psychologist, says those who take issue with the large salaries of top CEOs, especially when compared to the earnings of an average worker, are motivated by one thing: envy.

"There's no objective method for determining the correct ratio between the top and the bottom," said Locke, professor emeritus at the University of Maryland's Robert H. Smith School of Business. "There's no way to do it. It's just completely subjective, based on emotion."

• Top CEOs paid nearly $9M last year, 184 times average worker salary
• CEO-to-worker pay ratio to be public under new U.S. rules
• U.S. CEOs earned 303 times the pay of average worker

Locke was responding to a recent report by the Canadian Centre for Policy Alternatives that calculated in 2014, the top 100 CEOs in Canada made, on average, $9 million (including salary and stock options)  — compared to the almost $49,000 in average annual earnings across the Canadian population for someone working full time.

Or, put another way, the top executives were making 184 times that of the average Canadian, and on a typical day, by lunchtime, Canada's 100 top CEOs earned what an average Canadian will make in a whole year. 

"I think that's an indication of a compensation system that's out of control," said Hugh Mackenzie, the author of the report and a research associate at the think tank. 

A top CEO's salary in the late 1980s used to be around 40 to 50 times that of an average worker, Mackenzie said.

"I'm not going to argue that they don't merit more pay. The question is how much more, how highly leveraged should it be to stock market performance," he said.

'It's completely arbitrary'

Arguing over whether a CEO should or shouldn't be earning 50, 100 or 1,000 times what a worker earns is meaningless, said Locke, because there is no objective standard. 

"It's completely arbitrary," he said.

The fact is, Locke says, a good CEO, one who is smart, rational and visionary, is "worth his weight in gold."

"If you don't have the right strategy ... you destroy the company and you destroy all those jobs," he said. "If you really have a good person, there's no amount [of pay] that you can say is too much."

As for how a CEO's salary should be determined — that's up to the market, said Steven Kaplan, professor of entrepreneurship and finance at the University of Chicago Booth School of Business.

Kaplan suggested the question isn't whether CEOs are paid too much but whether or not they are paid above their market value.

"There is a market for CEOs," he said.

Companies have to offer huge salaries to attract candidates already earning several million dollars at law or consulting firms, Kaplan said.

"Why should [they] go to a job where there's huge risk, lots of scrutiny and get paid less? So, that's the kind of market forces that are operating here."

Whether it's fair that a CEO's salary is so much higher than that of an average worker is not a relevant question for the board of directors, he said.

"The relevant question is whether the board is paying the CEO the market wage. If the board is paying the CEO above a market wage, that is a problem."

'Market is actually dysfunctional'

But according to Mackenzie, the market is the problem.

"One of the points that I'm attempting to make is that the market is actually dysfunctional," he said. 

"You can't simultaneously be concerned about the impact of growing inequality and then decide you're not prepared to do anything when you see it," he said.

What's more, the current system of CEO compensation can have some profound implications on how the economy works.

The system, Mackenzie said, is driven by boards of directors, many of whom are CEOs themselves, and by compensation consultants who advise the boards and have an interest in pleasing their clients.

"There's an element of circularity to the system that I think just tends to keep salaries up regardless of what's happening to the performance of the company or the state of the economy," he said.

Jeffrey Dorfman, an economics professor at the University of Georgia, agreed that there's a huge problem with corporate governance and that shareholders need to have more power. 

Reform shareholders' rights

"Shareholders ought to have some sort of way to take a binding vote on CEO pay," Dorfman said. "Boards of directors should not be able to give away money that is not theirs to CEOs. 

"It's very hard for average shareholders to overturn directors in votes because most shareholders don't vote — mutual funds vote millions of shares in big blocks — and so that's where I think we should look for reform if we want to do something about CEO pay."

But Dorfman said Mackenzie's study also confuses the issue of CEO pay because it compares the highest-paid CEOs with the average worker. In the U.S., for example, the average CEO only makes around $170,000 US a year. 

"The [top CEOs] make a lot of money. Well, so do the top 100 professional athletes and the top 100 lawyers, plastic surgeons. We're choosing a data sample that purposely makes the problem a lot worse."

And it's doubtful that if the top CEOs were paid any less, that money would trickle down to the workers, Dorfman said.

"The company's workers are already getting paid whatever it took to hire them and keep them. That money is coming out of stockholders' pockets," he said. "So, workers should not be upset about CEO pay, but shareholders should be, because if CEOs are paid too much, it's the shareholders who are losing out."

Dorfman acknowledged that it is difficult to determine whether a CEO is worth what they're paid. Unlike a professional athlete, whose performance can be judged on statistics and measurable performance, "CEOs are doing vague, undefined leadership things."

"With a CEO, did the company do well because the CEO is really great? [Or] did scientists in the research lab invent something new? Did the chief marketing officer put together a great ad campaign? It's really hard to tell what the CEO did versus other people."