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CEO Pay Packages Send Instant Message to Investors

What is Larry Merlo telling investors? Compensation portal PayScale.com calculates that Larry Merlo, the CEO of CVS Health Corp., made roughly 434 times the salary of the median CVS employee in 2015, the largest ratio between CEO and employee pay on the PayScale list.

What is Larry Merlo telling investors? Compensation portal PayScale.com calculates that Larry Merlo, the CEO of CVS Health Corp., made roughly 434 times the salary of the median CVS employee in 2015, the largest ratio between CEO and employee pay on the PayScale list.

AP Photo/Evan Vucci

CEOs who make less-stratospheric compensation packages send a message to both investors and colleagues that they’re committed to the company on a longer-term basis, according to Brian Connelly, the McWane Family Professor of Management at Auburn University. 

“Our work on the gap in pay between the CEO and the average worker in their company is a topic that has really been heating up and has garnered national attention,” Connelly says. The presidential campaign has seen such groups as the AFL-CIO federation of labaor unions weighing in on the growing wage separation between top executives and workers.

“The Democratic Party is typically associated with reigning in pay inequalities, but Hillary Clinton has not exactly been able to present herself as the champion of this cause, in part because she has had a bit of trouble separating herself from the big banks on Wall Street,” Connelly says. Donald Trump’s background as a highly paid CEO also makes him an unlikely champion of pay equity.

“Whoever becomes president, they are going to have to work within the confines of the Dodd-Frank Act, which requires CEOs to report their salary in relation to the average worker in their organization,” Connelly says. “Top executives so far have had trouble understanding precisely what this means or how to do it, and as a result some companies are not yet even in compliance with the new law. In fact, the House Financial Services Committee met last month to discuss revision or reversal of the legislation requiring CEO-to-worker pay disclosure.” 

Connelly’s paper, “Minding the Gap: Antecedents and Consequences of Top Management-To-Worker Pay Dispersion,” is available online and was co-authored by Katalin Takacs Haynes, University of Delaware; Laszlo Tihanyi, Texas A&M University,

Daniel L. Gamache and Cynthia E. Devers of Michigan State University.

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