Reference no: EM13475912

Over the years, few topics have generated as much controversy as executive compensation. CEOs say, "We're a team; we're all in this together." But employees look at the difference between their pay and the CEO's. They see top management's perks-oak dining rooms and heated garages-versus cafeterias for lower-level workers and parking spaces a half mile from the plant. And they wonder, "Is this togetherness?" As the disparity in pay widens, the wonder grows. Thus the median value of total direct compensation for CEOs of Standard & Poor's (S&P) 500 companies was $8.4 million in 2010. Their total compensation in 2010 averaged $11.4 million. Hourly workers and supervisors indeed agree that "we're all in this together," but what we're in turns out to be a frame of mind that mistrusts senior management's intentions, doubts its competence, and resents its self-congratulatory pay. What's at stake, in short, is nothing less than the public trust essential to a thriving free-market economy.

Study after study, involving hundreds of companies and thousands of workers, has found evidence of a trust gap-and it is growing. Indeed, the attitudes of middle managers and professionals toward the workplace are becoming more like those of hourly workers, historically the most disaffected group.

According to the Economic Policy Institute, executive pay rose about 300 percent from 1992 to 2007. This compares with growth in the same period of about 14 percent in the inflation-adjusted real wages of college graduates. The gap persists because bonuses, typically tied to profits, are routinely awarded to top managers but not to other employees.

What about shareholder pressure to limit CEO pay? The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act grants shareholders a "say on pay" vote on executive compensation. In the year after the law was passed, however, shareholders rejected pay plans at only 39 out of 2,502 companies (1.5 percent).

To be sure, much of the trust gap can be traced to inconsistencies between what management says and what it does-between saying "People are our most important asset" and in the next breath ordering layoffs, or between sloganeering about quality while continuing to evaluate workers by how many pieces they push out the door.

There are other causes as well: lack of penalties to executives who caused the global financial crisis and the meltdown in financial services, together with pay systems that rewarded financial engineering and greed rather than prudent risk management and value creation. Moreover, financial-services leaders and board members failed to say, "Here's what went wrong. Here's how faulty incentives contributed to the problem; here's how we are going to fix it."

The result is a world in which top management thinks it's sending crucial messages but employees never hear a word. Thus, a recent survey found that 82 percent of Fortune 500 executives believe their corporate strategy is understood by everyone who needs to know. Unfortunately, less than a third of employees in the same companies say management provides clear goals and direction.
Confidence in top management's competence is collapsing. The days when top management could say, "Trust us; this is for your own good," are over. Employees have seen that if the company embarks on a new strategic tack and it doesn't work, employees are the ones who lose their jobs-not management.

While competence may be hard to judge, pay is known, and to the penny. The rate of increase in CEOs' pay split from workers' in 1979 and has rocketed upward ever since. CEOs who make 350 times the average hourly worker's pay are no longer rare. What is rare are policies like those of Whole Foods Market that prevent any executive from earning more than 14 times what the average worker makes. Said one observer, "The gap is widening beyond what the guy at the bottom can even understand. There's very little common ground left in terms of the experience of the average worker and the CEO."

While most U.S. workers are willing to accept substantial differentials in pay between corporate highs and lows and acknowledge that the highs should receive their just rewards, more and more of the lows-and the middles-are asking, "Just how just is just?"

Challenges:

Question 1. To many people, a deep-seated sense of unfairness lies at the heart of the trust gap. How might perceptions of unfairness develop?

Question 2. What are some of the predictable consequences of a trust gap?

Question 3. Can you suggest alternative strategies for reducing the trust gap?