Business

Abigail Disney has a point. Paying more to rank-and-file workers can be good for business

Posted July 17, 2019 11:32 a.m. EDT

— The pay gap between CEOs and their employees is huge and getting bigger.

In fact, Americans may have grown accustomed to the idea that C-suite executives would take home tens of millions of dollars a year, while the rank and file see their wages rise by a few percent.

Enter Abigail Disney.

The granddaughter of the Walt Disney Company's co-founder has recently reignited a conversation about wage inequality in America. She lambasted Disney CEO Bob Iger's $66 million pay package, appeared before Congress to advocate for higher worker wages and signed a letter with other rich Americans in support of a wealth tax.

Disney re-entered the news cycle this week, after an interview with Yahoo News, in which she described an undercover visit to Disneyland that left her feeling "so livid" about workers' conditions. She described workers who told her they would "forage for food in other people's garbage."

The company has responded to her criticisms by pointing out that it pays workers above the federal minimum wage, with a starting hourly wage of $15 at California's Disneyland, and that it also offers funding to pay for workers to earn a college, high school or vocational degree.

But at the center of Abigail Disney's cause is a proposal challenging the company to redirect half of its executive bonus pool into $2,000 checks for the lowest-paid 10% of its 200,000-person workforce.

The median salary of a Disney employee is $46,127, the company has reported. Iger's compensation amounts to more than 1,400 times that.

Disney's call for the company to compress its wage scale might be smart business.

The argument for astronomical executive pay boils down to this: There's a thin market for skilled leadership, so companies have to pay competitively. Also, since the 1990s compensation has largely been made up of stock awards, which means the CEO gets paid handsomely only if the company does well financially.

That doesn't turn out to be true in practice.

"CEO pay of course has skyrocketed, and it has absolutely nothing to do with productivity in any way, shape or form," says Judith Samuelson, director of the business and society program at the Aspen Institute. "Once you satisfy people's need, money is not as big a motivator."

A lot more goes into a company's stock price than the CEO's business strategy. Other important factors include the health of the economy, and external factors impacting the business' overall sector. For example, low gas prices might allow more people to visit amusement parks such as Disneyland. Also, CEOs can drive up the company's stock without doing anything to improve its fundamentals, through moves like buying back shares.

On top of that, CEOs have benefited from decades of "benchmarking." A salary consultant will look at a peer group of top executives, and recommend a package valued at the 75th percentile, which has ratcheted up compensation levels over time.

Corporate governance reforms since the financial crisis over a decade ago have done little to curb exorbitant pay packages. Although shareholders now have the right to vote on how much they're paying the CEO, they typically rubber-stamp the board's recommendation, as long as the stock price remains healthy.

Little consideration, however, is typically given to how competitively the company is paying workers on the lower end of the wage spectrum — despite research showing that higher wages make a bigger difference for people who weren't making much money to begin with.

Under those circumstances, higher wages can motivate employees to put in more effort, especially if the extra cash comes as an unexpected gift, according to a field experiment with 266 workers. Better pay also increases retention, which cuts down on the cost of recruiting and onboarding new employees. Finally, companies that pay substantially above market rates are better able to attract the best workers, as companies like Costco and the Container Store have learned.

Of course, pay isn't the only thing that matters for lower-skilled workers. Training, benefits programs, and a whole suite of other options can help workers' lives while improving performance — as articulated most comprehensively in MIT professor Zeynep Ton's book "The Good Jobs Strategy."

Investors are starting to realize this. An official advisory committee to the Securities and Exchange Commission in March recommended that the commission consider requiring companies to disclose an array of human capital management metrics, such as turnover rates and surveys of employee satisfaction.

"Today how a company manages its workforce is a big determinant of its return on invested capital and profitability," said John Streur, president and CEO of the investment management firm Calvert Research and Management, at a Spring hearing in the Senate Banking Committee. "It tells us whether management is expert at creating a workforce that can be globally competitive in the long term."

All of that suggests that companies would be well-served to spend less on the executive bonus pool and more on strategies that improve life for their frontline workers and lower level managers. At the very least, it would improve morale, increase the disposable income of people most likely to spend it, and make the American economy seem a little more fair.

"I think you could cut the pay of CEOs in half, and the economy would be the same size as it was last year," said Larry Mishel, former president of the Economic Policy Institute, which has long published studies of the CEO-worker pay ratio. "I don't think we have to argue that workers will be more productive, we just have to say that they're going to be better off, and it's hard to see that the firm will be worse off."