Hay Group research: No link between pay equality and performance

There is no consistent correlation between pay equality and company performance, according to new research from Hay Group.

Getting the balance right: the ratio of CEO to average employee pay and what it means for company performance looked at nine different sectors including energy, technology, financial, communications, utilities and consumer.

The research also found that chief executive officer’s (CEO) salary and total cash levels as a multiple of average employee salary and total cash levels varies significantly across and within sectors.

For example, CEOs in financial services firms earn a median of five times as much as the average employee, while CEOs in cyclical consumer organisations earn 27 times as much as the average employee.

The findings also show CEO salary and bonus levels do not vary nearly as much as average employee salary and bonus levels. Possible explanations for this are that CEO salary and bonus levels reflect market capitalisation rather than operational complexity or value at risk, or that a focus on market practice and the perceived restrictions put in place by institutional shareholders have created a situation in which CEO pay does not reflect individual company circumstances or strategies.

To measure pay equality within organisations, Hay Group research compared, across sectors, the wages (base salary and bonus) of an average employee with the base salary and total cash of the CEO. 

When looking at purely at base salary not bonuses, financial services firms have the smallest pay gap between the CEO and an average employee, followed by technology and energy firms. Retail organisations have the largest gap between CEO base salary and average employee wages.

However, when making the same comparison but using CEO total cash (pay including bonus) compared to average employee pay there is a slightly different picture. For example, in the oil and gas sector CEO’s receive nine times the average employee’s wage, while this rises to 43 times in the retail sector.

Jon Dymond, director of executive reward at Hay Group, said: “A blanket cap on executive pay would ride roughshod over the unique differences between firms’ business and operating models.

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“This calls into question whether CEO pay is truly fit for purpose. There is little or no adaptation to what organisations actually do, or to the unique challenges of driving value in each firm.”

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