Consumers Push Back Against Exorbitant CEO Pay

As inequality becomes one of the prevailing concerns of the 21st century, an increasing number of Americans are pushing back, both through civic engagement and conscientious consumption.

In a series of experiments, Bhavya Mohan, Michael Norton, and Rohit Deshpandé showed that Americans are deeply concerned about CEO compensation — enough that they will pay up to 50 percent more on average to avoid businesses with egregious CEO pay gaps.

“We do really see that people have a stronger preference for products from companies that pay fair wages”, says Norton, a professor at Harvard Business School. As the researchers dug deeper, they found that this holds particularly true for Democrats and independents — while Republicans didn’t seem to care at all.

In one set of surveys, the researchers showed people pictures of towels from a national retailer where the median worker earned $22,400 a year. They told half the people that the CEO made $24 million. They told the other half that the CEO made $112,000.

These were carefully chosen ratios, Norton says. Wal-Mart’s CEO pay ratio is believed to be about 1000-to-1, while most Americans believe the ideal CEO pay ratio is around 7:1.

The subjects were asked to what they would be willing to pay for the towels. People who thought the CEO was making $112,000 quoted a price that was 15 percent higher on average than people who thought the CEO was making $24 million.

In another, starker experiment, the researchers asked only if subjects would be willing to buy the towels given a certain price. People were split up into five groups, each shown different combinations of prices and pay ratios. They responded on a 7-point scale (1: Not at all likely, 7: Very likely).

Those who thought they were buying from a company with a high pay ratio were particularly unwilling to buy the towels, even at a discount. The researchers found that a company with a 1000-to-1 CEO pay ratio would have to slash its prices in half to keep up with a company that had a 5-to-1 CEO pay ratio.

These efforts will be all the easier following recent regulatory changes that will force public companies, by 2017, to report the ratio of CEO pay to that of the average employee. This is an important development given that most Americans still think CEOs at large corporations are paid 30 times as much as their average worker — when it is actually almost 300 times more. 

Granted, there are caveats: the pay disparity between a company’s executives and its lowest paid worker is not always indicative of income inequality.

All this is something of a surprising result. A large pay ratio doesn’t necessarily mean that companies are stiffing their rank-and-file employees. Companies that can afford rock-star executive pay packages might even be seen as particularly competent. High CEO pay could signal that a company offers high-quality goods. (By the same reasoning, customers sometimes shun non-profits, which they perceive to be well-meaning but inferior.)

On the other hand, people do like to feel virtuous about the things that they purchase. Consumers regularly say they’re willing to pay more for goods that are certified fair trade — and of course they do, since sweatshop sneakers and exploited coffee farmers are morally yucky. Apple suffered a PR disaster when Chinese workers began killing themselves at the factories of its suppliers.

Contrary to the objections of companies and their (usually libertarian and conservative) supporters, it is perfectly reasonable for consumers, and other actors in the market, to take into account ethics and sustainability in their decision making. While businesses defend such high compensation as necessary to both attract and retain talent — something that is very often not the case — they also have to take into account the demand of their customers and the market forces that influence their profits.

What do you think? If you could help it, would you pay more to acquire the goods and services of a company that compensated all its employees fairly equitably?

Read more from the Washington Post.

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