The Effect of CEO Compensation on Employee Motivation

In recent years, despite economic downturns and a nationwide recession, compensation levels for corporate executives have reached astronomical levels. According to the Economic Policy Institute, CEO salaries were 24 times greater than the average worker. Forty years later, that number had ballooned to 262 times greater. Clearly, these burgeoning salaries are something companies must evaluate and review, not only from a financial perspective, but also looking at their effect on employee motivation.

The growing discrepancy between the pay of CEOs and the average worker has potential to leave serious repercussions on the motivation of individuals in a number of ways. A first source of this effect can be revealed by the 1976 work of J.R. Hackman and G.R. Oldhman and their Job Characteristics Model of motivation. An important factor in Hackman and Oldham's model is task significance, or the potential of a job to affect the employee, the customer, and the company. It is clear that employees often use pay to gauge the importance of their work. When employees observe that their pay is significantly less, only a fraction, of other individuals within the organization, they can assume that their work is proportionately insignificant. Efforts made by the organization, such as representative participation (designated employees who represent the employee body as a whole in negotiations), may lose their value for employees when they feel so underappreciated by comparison.

In addition to leaving employees feeling insignificant, skyrocketing executive compensation can also have the simple effect of leaving employees perturbed about their own compensation packages. An employee completely satisfied with $50,000 a year may lose this satisfaction when they learn that other members of their organization are earning millions more. This puts a strain of feelings of internal equity, which brings us back to employees ultimately feeling unimportant in the face of their paycheck.

The true motivational effect of one's compensation, and its relation to others' in the organization, is not fully understood by most managers. It's not secret that managers often underestimate the motivating potential of their employees' paychecks. It is imperative that members of the organization at all levels recognize the impact of compensation on motivation and the negative effects that a dwindling paycheck (even when its only dwindling by comparison) can have.

Sources:
Ceo-to-worker pay imbalance grows. Economic Policy Institute.