Leveling the ‘Paying Field’

It may have taken a pandemic, but organizations finally appear to be ready to address a sensitive issue: the widening pay disparity between top executives and the rest of the workforce.

It’s an issue firms have been grappling with for years, of course, but one that has been magnified by the layoffs, furloughs, and health risks incurred by the broader employee population since COVID-19. To be sure, Korn Ferry data shows that over the last decade, primarily as a result of stock-based compensation, CEO pay has grown at a compound rate of 7.3% annually, compared to a 3% annual increase for the broader employee group, whose pay consists mainly of a base salary and no stock-based award.

Don Lowman, a Korn Ferry senior client partner and the firm’s leader of global total rewards, says that even though the decade-long bull market is responsible for the steep rise in executive pay, “it does seem disproportionate to the increase in pay for everyone else.” Moreover, Lowman concedes that the disparity “may be distorted relative to how profits and value are being generated in these companies.”

Against the backdrop of heavy layoffs and pay cuts in the past year, however, experts think organizations will work hard to close the gap—or at least make it less extreme. Korn Ferry data shows, for instance, that executives were the group most impacted by compensation reductions last year, taking an average salary cut of 20% globally, more than twice the amount of any other employee group. Recently, a large financial advisory cut its CEO’s pay by 17%, citing the company’s recent salary cuts and layoffs as a factor. At the opposite end of the spectrum, the push to raise the minimum wage is again gaining momentum, with organizations seeking to close the gap by raising hourly pay to $15 or more for frontline workers.  

Lowman says the pandemic is forcing leaders to examine where economic value is created in the business and how it is shared among investors, executives, and employees. “The rate of increase in total compensation for executives versus the broader workforce has been out of sync for some time,” he says. In particular, he says some argue service-oriented companies should be more comparable across firms, given that people are a significant source of value creation in those kinds of companies.

Still, closing the gap won’t be easy. Despite the United States and other countries putting pressure on firms by requiring CEO pay ratio disclosures, the disparity hasn’t budged much. In 2019, US CEOs made 264 times as much as their typical employee, while CEOs in England made 201 times as much. In Japan, the ratio is 58 times as much.

But Tom McMullen, a Korn Ferry senior client partner and a leader in the firm’s Total Rewards practice, says CEO pay ratio data can be misleading. He says companies may have lower pay ratios because they outsource lower-level work, while those with large global workforces may have higher ratios because of where employees are based. Moreover, it’s difficult to make comparisons within or across industries because the degree of capital and labor varies considerably. “There’s no easy button to push on this issue,” says McMullen.