CEO pay keeps growing faster than worker wages. These 7 charts show why that’s a problem for the US.
Imagine what you’d do with a million dollars. What about $10 million, roughly the annual salary of a CEO like Apple’s Tim Cook? Then think: What would you do with $89 million, the value of company stock a Monday SEC filing showed Cook has just received — or the more than $40 million he’s cashed in, according to CNNMoney?
Whether or not Cook eventually gives away most of his wealth to charity, as he has pledged to in the past, his compensation figures remain staggering. And he’s not alone among CEOs, according to a new report from the Economic Policy Institute, which found that CEOs at the 350 largest U.S. companies made 271 times what the average employee earned in 2016.
These figures, shown in context over time below, demonstrate how just how stark income inequality has grown between top-earning executives and rank-and-file workers. “CEO compensation is still near or at historic highs,” EPI research assistant Jessica Schieder told Mic in an email.
Whereas private-sector production workers’ and nonsupervisory workers’ annual compensation increased by less than 12% in real terms between 1978 and 2016, CEO pay (including stock options granted) rose by more than 800%, according to the EPI report.
Technically, the newest EPI figure is a notch down from 2015, when CEOs made 286 times the average worker’s salary. Uber’s expected new CEO Dara Khosrowshahi was the highest-paid executive that year, when he headed up Expedia. But “this small dip isn’t nearly as surprising as the dramatic swelling in the magnitude of this ratio since the 1960s,” said Schieder. “The longer-term trend is very clear.”
Indeed, because pay ratios are measured differently by different organizations, by some measures the divide has actually gotten worse. For example, the AFL-CIO’s Executive Paywatch, which compares the total compensation of CEOs of companies in the Standard & Poor’s 500 index with that of nonsupervisory workers, found that top executives made 347 times more than regular workers in 2016 — up from 335 times more in 2015.
The focus on publicly-traded companies makes sense: Company leaders typically don’t just get a flat salary like most workers. Like Cook, they also get stock options, which give them the right to buy shares of stock at set prices. When the stock market is doing well, executives experience way bigger income gains than others. “From year to year, CEO pay can fluctuate dramatically because CEO pay is so closely tied to the stock market, whereas worker pay only changes on a much smaller scale,” Schieder said.
One explanation for the growth in CEO pay is the fact that top executives tend to be able to cash out options “regardless of whether the rise in the firm’s stock value was exceptional relative to comparable firms,” EPI reports.
This data “casts doubt on the theory that CEOs are enjoying high and rising pay because their individual productivity is increasing,” EPI writes. “CEO compensation often grows strongly simply when the overall stock market rises and individual firms’ stock values rise along with it.” In other words, the pay bump top executives are getting doesn’t seem to be merit-based: “CEOs are getting more because of their power to set pay,” EPI argues.
Other research, in fact, shows that high CEO pay is actually correlated with worse company performance over the years that follow.
And no matter how you slice the numbers, the pay gap between big company CEOs and everyone else is still huge. Ever since the mid 1990s, the increases in CEO pay have even outpaced the growth in high earners’ incomes, as measured by executive compensation versus top 0.1%-er wagers, EPI found.
What does high CEO pay show about our economic priorities?
Not everyone agrees that the high ratio of CEO-to-worker pay is even a problem — at least not for the economy. George Will, a conservative political commentator, has argued that big salaries for innovators are necessary to encourage the type of entrepreneurship and risk-taking that improves everyone’s quality of life.
Edward Conard, Mitt Romney’s former Bain Capital partner, argues that concentrated wealth enables investors to directly inject money into the economy to generate growth.
But critics of high CEO pay and income inequality argue that the widening gap hampers overall economic growth by lowering the spending power of already low earners — and by undermining belief in meritocracy, which in turn can hurt innovation and productivity. After all, it is hard to create a thriving economy if workers are struggling to earn a living wage and 43 million Americans still live below the poverty level.
Indeed, while inequality might seem inevitable, the U.S. income gap reflect a growing divide that not all developed countries have shown over the last century — with more economically progressive nations like Germany, France and Sweden maintaining historically low levels of inequality in recent decades.
The problem of income inequality isn’t helped by several forces holding down the most financially vulnerable, including the waning power of unions, ballooning student debt and other financial challenges young workers face, as well as the increasingly oppressive costs for health services and care that older Americans must shoulder.
What are solutions to income inequality?
The Economic Policy Institute has a few recommendations for helping to bring the CEO-to-worker pay ratio back down to more reasonable levels.
One is to impose a higher tax rate for the highest earners in order to reduce the incentive of CEOs to push for higher incomes. The group also suggests taxing companies more if they have more substantial discrepancies in what CEOs get paid versus the average worker. As it stand, both income and capital gains tax rates on high-earners are low relative to historical averages.
Another related option is to give shareholders the right to vote on executive compensation, which would make it harder for CEOs to convince companies to pay them exorbitant sums.
But taxing wealthier Americans makes a difference on only on one side of the equation: How those revenues raised are used — whether for reducing budget deficits or funding government assistance programs — will make the largest impact on the financial well-being of typical workers and Americans in need.
In recent years, groups like the Center on Budget and Policy Priorities have found that existing U.S. safety nets are crucially important for lifting millions of Americans out of poverty, and improving their financial opportunities by subsidizing the cost of necessities like food and housing.
But whether the safety net will stay in place depends at least in part on political outcomes. Proposed tax cuts by President Donald Trump — likely paid for through spending cuts on health, education, nutrition and other assistance — would disproportionately cost the bottom four-fifths of U.S. households, according to Tax Policy Center data. Meanwhile, budget cuts would disproportionately affect low- and moderate-income programs, the Center on Budget and Policy Priorities reports.
Is U.S. government assistance unusually generous?
Compared to other countries around the world, the United States actually trails in terms of providing a social safety net through welfare and other programs that redistribute financial opportunity to reduce poverty.
Internationally, countries like Finland with more progressive redistribution of wealth through taxes and transfers through social programs end up more significantly decreasing their rates of income inequality.
And as it stands, existing safety net programs help Americans of all races, ages and educational backgrounds, lifting them above the poverty line and giving them the opportunity to compete in the workforce — despite the ever-widening divide between the most and least richly compensated employees.
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