Psychological Effects of Executive Salary Imbalance

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When the salary imbalance between a company’s CEO and those below becomes excessive, the entire organization may be thrown out of whack. In a recent study by the CIPD, it was revealed that this wage imbalance does have a noticeable psychological effect on the workers below the CEO. Almost 60% of employees used in the study admitted that the salary imbalance demotivates them, and more than half said they felt excessive executive pay damaged the company’s reputation. This makes it more difficult to retain loyal employees and can turn off some job seekers with excellent talent.

However, the overpayment of CEOs does not only affect those working below, it affects the organization as a whole. In another study by Charles O’Reilly, Professor of Human Resources Management and Organizational Behavior at Frank E. Buck, found that in one company the CEO was being overpaid by 50%, while the general managers and those below were underpaid by 50%. The turnover rate for the general managers in this company was much higher than in companies with employees being equitably paid. This turnover has a corporate cost – they are losing employees with valuable experience within the company that would take a new employee years to gain. “What people haven’t been looking at is the consequences of making a wrong decision — paying too much or too little.” O’Reilly says, “This study is evidence that there are consequences. Overpayment leads to an increased wage bill. That’s money the shareholders would otherwise get. Overpayment of the CEO also leads to turnover at lower levels.”

Let’s come back around to focus on the psychological effects of this wage imbalance on the employees below the CEO. As stated earlier, almost 60% in the CIPD study said seeing the unfair pay demotivates them in the workplace. This demotivation can lead to a decrease in effort put forth which typically results in lower productivity and lower work quality. The wage imbalance can contribute to a loss of group solidarity and even theft, and can also cause employees to perceive more inequity than actually exists, which can cause major dysfunction in the workplace.

So now I’m sure you’re wondering how you can prevent this from happening. How can you keep your employees engaged in their work? Research has shown that organizations that provide employees with career development opportunities are far more likely to retain motivated employees than those that do not offer such opportunities.  When receiving new training and opportunities to develop their professional skills, an employee’s self worth increases because their employability increases. This keeps them motivated by allowing them to think much broader in terms of their career, and encourages them to focus more on their career mobility, agility, and flexible professional lives. It helps them focus more on what they can accomplish going forward rather than feeling stuck in the position they’re in currently.

Overall, going forward, more boards of directors should start assessing this wage imbalance as a social corporate issue rather than solely an economic one. There are far more likely negative repercussions to come from employees due to psychological and social factors stemming from the wage imbalance rather than the actual money itself.

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