The Cult of the CEO: The ‘Above Average’ Effect

14 Pages Posted: 17 Nov 2017

See all articles by Manfred F.R. Kets de Vries

Manfred F.R. Kets de Vries

INSEAD - Entrepreneurship and Family Enterprise

Date Written: November 16, 2017

Abstract

Many CEOs earn more in one workday than the average worker makes in an entire year. The question is whether these extremely high CEO compensation packages undervalue the contributions that other employees make to the success of the company. What will the effect of excessive CEO pay have on employee morale? It also raises the question why companies with high CEO: worker pay ratios often have lower shareholder returns than companies with lower ratios.

This article explores the reasons why such pay discrepancies continue to exist. The pros and cons of these excessive compensation packages are discussed, including the “above average” effect — and how this “above average” effect can have such a dramatic, inflationary impact on compensation packages. As self-policing by the CEO community seems unlikely, a number of countervailing measures are suggested that could keep the compensation game within reasonable boundaries.

Keywords: CEOs, Compensation, CEO to Worker Pay Ratio, Above Average Effect, Greed, Human Motivation, Social Contract

Suggested Citation

Kets de Vries, Manfred F.R., The Cult of the CEO: The ‘Above Average’ Effect (November 16, 2017). INSEAD Working Paper No. 2017/74/EFE. Available at SSRN: https://ssrn.com/abstract=3072329 or http://dx.doi.org/10.2139/ssrn.3072329

Manfred F.R. Kets de Vries (Contact Author)

INSEAD - Entrepreneurship and Family Enterprise ( email )

Fontainebleau Cedex, F-77305
France

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