Podcast Summary: Is Business Broken? Episode: How Do Employees Feel about Executive Compensation?
Host: Kurt Nickish
Guests: Charlie Tharp, Professor of the Practice at BU Questrom School of Business; Peter Fasolo, Former Chief Human Resources Officer at Johnson & Johnson
Release Date: March 13, 2025

Introduction

In this episode of Is Business Broken?, host Kurt Nickish delves into the nuanced perceptions employees hold regarding executive compensation. Building on previous discussions about how executive pay is determined and perceived by investors, this episode shifts focus to the workforce beneath the corporate hierarchy. The conversation explores how pay structures influence workplace culture, trust, motivation, and the delicate balance companies must maintain to reward top leaders while ensuring employees feel valued and fairly compensated.

Employee Awareness of Executive Compensation

Peter Fasolo begins the discussion by addressing employee awareness of executive pay within large organizations. Fasolo notes that while employees may glance at executive compensation through proxy statements, their primary concern tends to revolve around their own roles and immediate career trajectories.

"[...] the average employee may curiously look at executive pay as expressed through the proxy, but their primary focus [...] is within their job family and maybe a level or two up based on their career trajectory and their aspirations with regard to movement."
— Peter Fasolo [01:39]

Theoretical Perspectives on Pay Gaps

Kurt Nickish introduces Tournament Theory, which posits that significant pay gaps can motivate employees to work harder in hopes of ascending the corporate ladder and achieving higher compensation. Charlie Tharp elaborates on this, emphasizing the importance of providing clear pathways and development opportunities for employees to realize their advancement.

"Tournament theory could cut both ways. [...] If the company isn't providing those opportunities and helping people develop [...] it would be a little frustrating."
— Charlie Tharp [02:39]

However, Tharp also highlights Equity Theory, suggesting that perceived fairness in pay relative to peers is paramount. Large disparities can diminish motivation if employees view compensation as unjust.

"Equity theory, am I paid fairly versus my peers? Secondly, is it worth working harder and investing?"
— Charlie Tharp [04:11]

Impact of CEO Pay on Employee Morale

The conversation shifts to the visibility of CEO pay and its impact on employee sentiment. While Tharp acknowledges that CEO compensation can become a focal point when employees perceive broader injustices within the company, such as layoffs or increased operational costs, he asserts that CEO pay alone rarely drives employee motivation.

"If you're paying the managers at the median or 75th percentile, but the average worker at the 25th percentile, tournament theory kind of collapses because the procedural justice... does not speak to be fair to employees."
— Charlie Tharp [04:18]

Fasolo concurs, noting that despite regulatory requirements to disclose CEO pay ratios, these figures have not significantly influenced employee perceptions or behaviors.

"The research is bearing out that the CEO pay ratio hasn't had a huge effect to changes in pay or awareness of pay to the average worker."
— Peter Fasolo [07:33]

Transparency in Pay Structures

A significant portion of the discussion centers on pay transparency. Tharp outlines legislative movements across various states mandating the disclosure of salary ranges in job postings and prohibiting inquiries into a candidate's current pay, aiming to combat systemic pay disparities, particularly gender-based.

"Colorado was the first state. Today there are 11 states that require when you post a job ad you're looking for employees, you have to list the pay for that job."
— Charlie Tharp [10:08]

Fasolo shares Johnson & Johnson’s proactive approach to transparency by standardizing pay frameworks nationwide, beyond state requirements. This strategy ensures consistency and fairness across the organization, fostering trust and clarity among employees.

"We decided to simply utilize the same framework. We would post the worth of the job and the salary bands for all jobs we posted across the U.S."
— Peter Fasolo [12:31]

Innovative Pay Models and Employee Ownership

Exploring innovative compensation models, Fasolo describes Johnson & Johnson’s use of variable pay systems that align individual performance with departmental and company-wide success. Notably, CEO and top executive bonuses are excluded from certain multipliers to reinforce that employee contributions are directly tied to overall company performance.

"We would exclude the CEO and his direct reports on that benefit. This was a way for us to communicate to our employees that their efforts and their contributions were a direct result of the overall company doing extremely well."
— Peter Fasolo [14:55]

Tharp advocates for broader employee ownership as a means to distribute corporate success more equitably. He suggests that increasing employee ownership can align interests across all levels, fostering a culture of shared success and accountability.

"I would look for a way to get more ownership in the hands of all employees."
— Charlie Tharp [19:32]

Fasolo echoes this sentiment, emphasizing the importance of an ownership mindset where all stakeholders are aligned with the company’s value creation.

"Charlie’s exactly like this ownership model where everyone is aligned with value creation with all stakeholders, shareholders, investors, executives and employees."
— Peter Fasolo [20:52]

Key Takeaways and Conclusions

• Fairness Over Disparity: Employees prioritize perceived fairness in pay over the actual size of executive compensation. Transparent and equitable pay structures foster trust and motivation.

• Transparency Laws: State-level initiatives are pushing companies towards greater pay transparency, which can help mitigate systemic inequalities and enhance employee satisfaction.

• Innovative Compensation Models: Companies like Johnson & Johnson illustrate how structured variable pay and selective bonus exclusions can align employee rewards with company performance without exacerbating pay gaps.

• Employee Ownership: Increasing employee ownership can bridge compensation disparities, promoting a sense of shared success and fostering a more inclusive corporate culture.

Notable Quotes

• "The number one thing is being able to tell people exactly how their pay is determined and they can make their own judgment, then if that's a fair process."
  — Charlie Tharp [05:27]

• "This ownership mindset is exactly the right direction to go in."
  — Peter Fasolo [21:12]

Conclusion

This episode underscores the critical balance companies must strike between rewarding top executives and ensuring that employees feel valued and fairly compensated. Through transparent pay structures, innovative compensation models, and fostering an ownership mindset, businesses can cultivate a motivated and engaged workforce while maintaining competitive executive compensation. As the landscape of corporate pay continues to evolve, ongoing dialogue and adaptive strategies will be essential in addressing employee perceptions and achieving equitable compensation practices.

For more insightful discussions, follow Is Business Broken? on Apple Podcasts, Spotify, or your preferred podcast platform.