Background

CEO-employee pay disparity, or the extent to which a CEO is paid more than a typical employee in a firm, is a highly contentious issue. On the one hand, because CEOs have valuable experiences and strong qualifications, they enjoy relatively high bargaining power. On the other hand, many employees do not have such skills and perspectives so they are in inferior positions when negotiating salaries with firms. For example, in 1978, the average CEO pay is $1.5 million, and the average CEO pay is $16.3 million in 2014—an increase of 900%. Yet over the same time, the average employee’s annual pay just increased from $48,000 to $53,200, or 11%. Thus, many observers have commented that CEOs could be paid more than their employees, and this disparity is even higher in certain firms (e.g., 3,566 times in The Gap, 3,660 times in Abercrombie & Fitch Co., and 40,668 times in Tesla). Existing theories have considered the structural or external factors, arguing that the existence of high CEO-employee pay disparity is because employees do not have superior skills or lack collective bargaining power. It is less clear whether CEO-employee pay disparity is a reflection of a CEO’s personal values or political ideology.

How Does CEO Political Ideology Influence CEO-Employee Pay Disparity?

In our study, published in the Journal of Management Studies, we examine how a CEO’s political ideology may influence a firm’s CEO-employee pay disparity, and the boundary conditions that alter this association. By political ideology, we mean the extent to which an executive is politically liberal, moderate, or conservative.

We hypothesize that liberal CEOs have the motivation to address the CEO-employee pay disparity because liberals are more aware of the potential limitations of the labor market and open to social change. In contrast, conservative CEOs tend to believe that the labor market is highly efficient and that there is no need to intervene. Meanwhile, conservatives are inclined to maintain the status quo and resist social change. Accordingly, conservative CEOs are more likely to maintain a relatively high level of CEO-employee disparity. Our findings support this argument.

Our results also suggest that the effect of CEO political liberalism is more pronounced when a board is also politically liberal and/or when a CEO has more power. These findings indicate that the alignment of CEO-board political ideology and the holding of strong influence on a firm can amplify the effect of CEO political orientation in addressing the within-firm income inequality issue.

Implications for Boards and Regulators

This study shows that CEO political ideology is a potent determinant of CEO-employee pay disparity. Hence, apart from external factors such as regulations or industry norms, CEO political ideology as a personal disposition can influence a CEO’s motivation to construct CEO-employee pay gap. For boards, our findings suggest that it is useful to leverage a CEO’s political stance to assess, evaluate, and even predict how the CEO may treat employees financially. For regulators, our results suggest that it could be difficult to expect firms in an industry to maintain the same level of CEO-employee pay gap, as CEOs can differ reasonably in their political views. Overall, boards and regulators may need to understand, and take into account, executives’ political ideology, when dealing with the issue of within-firm income inequality.