Peter Drucker, the pre-eminent management guru of the 20th century, famously declared that any company where the pay of the chief executive was more than 20 to 25 times that of the ordinary worker was heading for big trouble, most importantly from a loss of morale.
If he is correct, leading international companies, and especially US ones, are creating a mountain of troubles for themselves, with new research showing that chief executive pay at the biggest companies is climbing again and is more than 250 times that of ordinary workers.
The Economic Policy Institute in a just published issue brief says that chief executive pay in 2012 "was extraordinarily high relative to typical workers and other high earners". The institute concludes that, "today's executives receive substantial rents". "Economic rent" of course is one of the dirtiest expressions.
Alarmingly, runaway CEO pay is being assisted by the US Congress, which has just voted to repeal the section of the Dodd-Frank law that might help to curb excessive pay to top bosses.
It is not easy to check pay differentials. Although the Securities and Exchange Commission demands that compensation to chief executives must be revealed, including salary, bonus, perks, pension and stock awards, most companies fiercely resist giving information on how much they pay their workers.
But Lawrence Mishel and Natalie Sabadish of the Economic Policy Institute calculated that average CEO compensation in 2012 was US$14.1 million last year, using a measure that covers the chief executives of the top 350 companies, including the value of stock options exercised or realised. This was a rise of 12.7 per cent over the previous year and of 37.4 per cent since 2009.
Between 1978 and last year, they add, "CEO compensation measured with options realised increased about 875 per cent, a rise more than double stock market growth and substantially greater than the painfully slow 5.4 per cent growth in a typical worker's compensation".
They also calculate that the chief executive-to-worker compensation ratio back in 1965 was 20.1 to 1, and had risen to 29 times by 1978. But thereafter the pay differentials between the boss and the workers began to run away. In 1995, it was 122.6 to 1, and by 2000 it reached a peak of 383.4 to 1.
Last year, say Mishel and Sabadish, the continuing rise in chief executive pay meant that the boss-to-worker ratio was 272.9. By a different measure, using stock options granted, the chief executive's pay was only 202.3 times that of the typical worker.
Their findings, though way in excess of Drucker's recommendations, are in line with other analyses of how well paid today's chief executives are. The American trade union AFL-CIO says the average CEO-to-worker ratio is 357 to 1. Bloomberg reported that the multiple for Standard & Poor's 500 companies is 204, and for the top 100 companies it surveyed, the chief executive on average got 495 times as much as did the average worker.
The consultancy Culpepper and Associates did a larger survey of companies in the US and calculated that the average chief executive's total compensation is only 5.4 times that of the average employee. But the bigger the company was in terms of sales, the bigger the share of the chief executive: for companies with sales of between US$250 million and US$1 billion, the multiple is 12.5; for the US$1 billion to US$2.5 billion range it rises to 33.2; and after US$2.5 billion it soars to 91.8.
Bloomberg Businessweek looked at S&P 500 companies by sector and found that in every major sector the average chief executive earned more than 120 times the average worker, and in the financial sector the pay differential was more than 330.
What should be most worrying is that chief executives seem increasingly to regard high pay as their right. Only one company in the Bloomberg top 100 came up with its own number for the pay differential. Wynn Resorts said its ratio was 251.
Businessweek quoted an irate response from Simon Property Group, whose CEO compensation was US$137.2 million in 2011, or 1,594 times what the average worker in the funds, trusts and other financial firms area is paid. "The outdated and incorrect figures being used, together with a flawed methodology, results in a distortion that is insulting to our employees," the firm said.
Some economists and corporate spokesmen claim that CEO compensation is set by the market for skills. Private company executives, corporate lawyers, hedge fund and private equity investors have also enjoyed whopping pay increases, they say, so this proves that market forces are driving the pay increases.
Drucker however understood the value of a healthy compensation balance. Excessive CEO pay, he thought, undermines teamwork and promotes a winner-take-all attitude. He said he was "not talking about the bitter feelings of the people on the plant floor. They're convinced that their bosses are crooks anyway".