Another downside of soaring CEO pay

Ballooning compensation for CEOs has come under fire as it far outpaces the often-meager wage growth for the rank-and-file. Here’s another point of contention: That outsized pay also affects workers’ satisfaction with their corporate leaders.

Lavish compensation is statistically linked to lower CEO approval ratings from the company’s employees, according to a new study from employment site Glassdoor, which studied 690 large, publicly traded U.S. companies and their employees’ approval ratings of their CEOs. The ratings come from Glassdoor, which asks employees to provide either an “approve”, “disapprove” or “no rating” vote on their CEOs.

The role of executive comp has come under increasing scrutiny in the post-recession years, when the fortunes of the top 1 percent of income earners -- which includes many CEOs -- have easily outrun that of their own workers. At the same time, new research is throwing doubt on whether high CEO pay represents a well-earned reward or simply canny negotiating. 

“The CEO is the flagship role at the company, and they set the tone for the culture,” said Andrew Chamberlain, chief economist at Glassdoor. “Those decisions absolutely have a day-to-day effect on the employees. Even though most employees don’t work with the CEO directly, their views drive engagement and makes a big difference.”

The link between higher CEO pay and lower employee ratings was one of the study’s surprises, Chamberlain added. The research found one exception, however: If the company has an excellent culture, employees can be more forgiving of high CEO pay.

Employees may feel that a higher-paid CEO needs to demonstrate remarkable outperformance to justify the pay package, and that feeling may be more pronounced for companies within industries that are struggling with slow growth or low wages for the average worker.

That’s borne out by the average CEO ratings by industry, Glassdoor found. Leaders at companies within fast-growing or high-paid industries, such as finance and information technology, tended to receive higher ratings. CEOs within troubled industries, such as manufacturing and retail, earned the lowest ratings on average.

“Many retail jobs are low-skilled positions where people are dissatisfied with their career arcs. Manufacturing is a declining industry,” Chamberlain said. “During good times, CEOs get an A on their report card, and during bad times the CEOs flunk out.”

Another surprising finding was that gender and educational background don’t make a difference with employee satisfaction with their CEO. When controlled for factors such as industry and financial performance, workers viewed male and female CEOs virtually identically, although Glassdoor noted that women CEOs accounted for only about 5 percent of the sample. Having an MBA didn’t make a difference to employee approval ratings, either.

CEOs who had founded their company tended to receive higher ratings than those who were promoted internally or hired from outside, the study found. CEOs who rose from within generally received better ratings than outside hires.

“Not everyone can be a founder, but every CEO can act like a founder,” Chamberlain said. “They have passion for their companies, and they view it as an extension of themselves. That’s something you can’t fake.”