By Rick Wartzman and Kelly Tangy
July 30, 2022 12:00 pm ET

As pay for top executives began to soar decades ago, the management scholar Peter Drucker feared that the trend would prove problematic in two respects: for the health of individual businesses and for the health of society.

Our latest research suggests that he may have been only half-right.

We based our findings on the Drucker Institute’s measure of management effectiveness, which is grounded in many of Mr. Drucker’s core teachings. It serves as the foundation of the Management Top 250, an annual ranking produced in partnership with The Wall Street Journal. The 2021 list was published in December.

In all, we used 34 different indicators last year to examine 846 large, publicly traded U.S. corporations in five areas: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength.

To create our ranking, companies are compared in each of the five categories, in addition to their overall effectiveness, through standardized scores with a typical range of 0 to 100 and a mean of 50. We define effectiveness as Mr. Drucker did: “doing the right things well.”

For our latest analysis, we tried to determine what statistical relationship might exist between our model and the ratio of the compensation of a company’s CEO to the median compensation of its employees.

CEO pay has become both a symbol and source of income inequality in America, with the median remuneration for the heads of S&P 500 companies rising to a record $14.2 million last year. The pay-ratio metric, meanwhile, has become increasingly important in the eyes of socially conscious investors and policy makers hoping to rein in CEO compensation.

“It’s gaining a lot of interest and attention,” says Amit Batish, director of content for Equilar Inc., a supplier of corporate leadership data. This has been partly driven by the pandemic, which, as Mr. Batish points out, has put “a focus on employee well-being and whether employees are being paid fairly.”

To obtain the pay-ratio figures, we turned to Equilar, which tracks this information for 482 of the corporations that we cover. (Public companies have been mandated to disclose their pay ratio since 2018. The latest data available from Equilar is for 2021.)

We divided the companies into quartiles, stretching from those with the highest pay ratios to those with the lowest over the past three years—a median of 481 to 1, 243 to 1, 154 to 1 and 85 to 1. Then we looked at the average scores in our rankings for 2019-2021 for the companies in each of these four groups.

The pattern that emerged was clear and consistent: The higher the pay ratio, the higher the average scores in our rankings. This was true for overall effectiveness, as well as for every one of the five areas we gauge.

Those in the highest pay-ratio quartile had an average total effectiveness score of 57.0 on our 0-100 scale, compared with a 50.2 for those in the lowest quartile—a significant difference.

The spread in customer satisfaction was also substantial, with firms in the highest pay-ratio quartile scoring an average of 53.9 and those in the lowest quartile at 46.9. The picture in innovation was similar; companies with the widest pay gaps scored 58.8 on average, while those with the narrowest scored 51.8.

The results surprised us. Our expectation had been that, if anything, companies with the highest pay ratios would fare worse in our rankings—not better—because too big a discrepancy would make it difficult to nurture the kind of teamwork and trust that businesses need to succeed.

As Mr. Drucker, who died in 2005, said in a 1998 interview, “I have often advised managers that a 20-to-1 salary ratio is the limit beyond which they cannot go if they don’t want resentment and falling morale to hit their companies.”

So, why didn’t things play out this way?

A key reason, we suspect, is that the majority of CEO pay comes in the form of stock and stock options, and the most effectively managed companies in our rankings have, by and large, watched their shares perform very well in recent years, easily outpacing the benchmark Dow Jones U.S. Total Stock Market Index.

To be sure, when exploring different variables than we do, other experts have produced evidence more in line with Mr. Drucker’s thinking. For example, a 2016 study by MSCI Inc. indicates that when pay imbalances between the CEO and everybody else are greater, labor productivity is lower. And a 2017 study by Harvard University’s Ethan Rouen found that “pay disparity matters to employee satisfaction, with consequences for firm performance”—specifically, year-ahead, industry-adjusted return on net operating assets.

Moreover, an earlier analysis that we ourselves conducted shows that those companies that pay their employees the best score higher than their lower-paying peers across every area of our model.

Then, too, there is Mr. Drucker’s other concern—the effect of outsize CEO pay on the cohesion of society.

Miguel Padro, assistant director of the Aspen Institute’s Business and Society Program, says the fact that companies with the most extreme pay gaps scored so well in our rankings underscores “that corporate success should not be confused with corporate effectiveness at solving society’s deepest challenges.”

“We may have really well-run big businesses,” he says, “while society comes apart because of polarization, massive inequality and widespread mistrust.”

Sarah Anderson of the Institute for Policy Studies, which has been sharply critical of “CEO pay-inflating tactics,” stresses that a pay ratio of even 100 to 1, much less 400 or 500 to 1, is going to be seen as “outrageous” by most people.

Mr. Drucker would undoubtedly agree. As early as 1977, he called for a “corporate policy that fixes the maximum compensation of all corporate executives” at no more than 25 to 1.

Otherwise, Mr. Drucker later said, those at the top would make so much money compared with their front-line workers and even midlevel managers, “whole dimensions of what it means to be a human being and treated as one aren’t incorporated into the economic calculus of capitalism.

“For such a myopic system to dominate other aspects of life,” he added, “isn’t good for any society.”

That’s a position we’re sure he’d stand by—no matter what the rankings say.

Mr. Wartzman is head of the KH Moon Center for a Functioning Society, part of the Drucker Institute, and Ms. Tang is the institute’s senior director of research. Email them at reports@wsj.com.