In 2020, the best CEOs earned 351 times more than the typical worker
The pay gap between CEO and employee has grown exponentially in recent decades.
The Economic Policy Institute (EPI) estimates that CEO compensation has increased 1,322% since 1978, while typical worker compensation has increased only 18%. In 2020, CEOs of America’s 350 largest companies earned $ 24.2 million, on average, 351 times more than a typical worker.
A 2019 report from the Institute for Policy Studies estimates that 80% of S&P 500 companies pay their CEOs more than 100 times more than they pay their median worker. This means that it would take 100 years for the average employee at one of these companies to earn what their CEO makes in a year.
This kind of inequality creates anxiety for families across the country and across the political spectrum. According to Pew, a majority of Americans believe that future generations will be worse off financially.
CNBC Make It recently spoke with Lawrence Mishel, a distinguished member of the EPI, about why the pay gap between CEOs and employees is widening and what happens if nothing is done about it. to fill in.
How did we get here?
“CEO pay took off a lot in the 1990s. It did so when the stock market was booming and it’s basically a market that I think is out of control. It’s what you might call a Lake Wobegon market, ”says Mishel, referring to the NPR show. “A Prairie Home Companion” which included a regular segment from host Garrison Keillor titled “The News from Lake Wobegon,” a fictional town “where all the women are strong, all the men are good looking and all the kids are on top. of the average. ”
Mishel’s argument is that everyone in Lake Wobegon thinks they are above average, just as every company thinks their CEOs should be paid above average.
“Companies think they’re an important place and they want a great executive. And if you have a great executive, then they should definitely be paid above average,” says Mishel. “Now, if each company decides that they are going to pay their executives above the average, and you look at what other executives’ salaries are at companies similar to yours and make sure it’s more, over time it just gets bigger and higher and higher. “
However, Mishel points out that the salary is a relatively small percentage of what CEOs typically earn.
“CEO compensation in our study reflects salaries, bonuses and long-term incentives, but most importantly, the stock options that a CEO has cashed in each year, as well as any stock invested,” a- he declared. “Stock-related compensation represents approximately 85% of CEO compensation. “
Stock-linked compensation is one of the main reasons CEOs earn so much more than top incomes.
“Previously, in the 1950s, 1960s and 1970s, CEOs earned 3.3 times what the top 0.1% earned. Today it’s over six times,” says Mishel. “CEOs now earn 351 times more than a typical worker, but in 1978 it was only 31 times. In 1989, it was 61 times. “
Mishel also mentions six potential reasons why the salaries of typical workers have not risen as quickly as typical CEO pay: high unemployment (which forces workers to accept the lowest possible wages), globalization ( which allows companies to find the cheapest workers in the world), erosion of unions (making it harder for workers to bargain collectively), low labor standards (including a low minimum wage), increase in non-compete clauses (making it difficult for workers to find better wages in their industry) and domestic outsourcing (such as a shift to a freelance workforce).
“Wages and benefits haven’t increased much over the past 40 years. They’ve grown a lot less than what the economy has produced,” he says, referring to research that found productivity of workers has grown 3.5 times faster than the average worker wage since the late 1970s.
Does increasing CEO pay increase performance?
Proponents of high executive pay often suggest that shareholders and board members choose to pay CEOs high sums in the hope that an expensive but talented, dedicated or ruthless CEO can help increase the share value.
However, “I don’t think there is much evidence that paying CEOs more improves performance,” says Mishel. “When you look at the last 40 years, you can see how much profitability has increased, you can see how much the stock market has increased and CEO compensation is increasing, much more than that – 60%, more than the rising stock market. . “
In fact, a 2016 report by financial services firm MSCI Inc. found that companies with the highest paid CEOs underperform their competitors.
“There’s this notion that CEO compensation is tied to the stock market, so a CEO is paid for their performance because their compensation increases with the stock market. Well, not really so true. The measure of stock prices that In this, pay for performance is not about whether your company’s stock price goes up more than the stock price of its competitors. It’s just if the stock price goes up, ” explains Mishel.
“Now we have a lot of things that are driving the stock market up, things that have nothing to do with the performance of executives. When Trump gave huge tax cuts to companies, it gave the stock market a boost. . not because of the performance of a CEO. If interest rates are low and more money is flowing into the stock market, the stock market may go up. It is not the performance of executives. “
He continues, “Does it take a typical worker 350 times to get up in the morning and do a good job when you went back 30 times in the 60s? No. I think [CEOs] always got up in the morning and did a good job out of pride, because that’s what they were trained for. And it’s still a lot of money! “
Potential consequences and solutions
There is a wide range of theories about what will happen if inequality continues to widen at the current rate.
In a now famous 2014 Politico article titled “The Forks Are Coming… For Us Plutocrats,” Nick Hanauer, a billionaire entrepreneur and self-proclaimed “proud and shameless capitalist” says he worries that inequality is increasing at a pace so fast that the United States is “becoming less of a capitalist society and more of a feudal society”
“Unless our policies change drastically, the middle class will disappear and we will return to late 18th century France. Before the revolution, ”Hanauer writes, predicting that pitchforks and guillotines will be the next step if CEOs like him don’t speak up. against inequalities.
And many have expressed contempt for billionaire entrepreneurs like Jeff Bezos, Richard Branson and Elon Musk who have invested heavily in space travel amid growing inequality. Some even fear that these billionaires amass enough wealth to abandon the planet.
Mishel says these results are unlikely and instead says he is “hopeful”.
“We are now at a time when workers feel free to act and demand more – better jobs,” he said, adding that despite being identified as “longtime critic” of both political parties “what the current administration and Congress are doing seems to center the needs of workers moving forward.
Mishel continues, “The very first bill passed was the US bailout, which put us on a path to full employment by the end of 2022. We expect the unemployment rate to hit 3.5. % in fall 2022. That’s pretty good. “
He also references provisions in the Reconciliation Bill currently on the Hill that would create monetary penalties for companies that violate workers’ union rights and an executive order from Biden that calls on the FTC to implement rules. to limit or prohibit employers from imposing non-competition clauses on employees. .
“I think we see policies trying to put the thumb in the balance for workers, to give them a better balance vis-à-vis employers. Now, if workers are able to assert themselves and assert themselves, and to reap results, that’s going to make it harder for CEOs, ”Mishel said.“ These are all really powerful things and so I imagine that if this program is legislated we will see strong salary growth for the vast majority. And we will see inequalities decrease over the next five years. “