CEO Compensation Needs To Be Controlled In The U.S.

These charts show how corporate CEO compensation has gotten out of control in the United States. The top chart shows that CEO's earn a much higher ratio to the average worker in the U.S. than in any other developed nation. The second chart shows the growth of CEO pay to that of the average worker in the corporation -- from 20:1 in 1965 to about 312:1 in 2017. The third chart shows that corporate CEO's receive more than even other members of the top 0.1% of earners -- about 5.45 times as much.

CEO pay (and that of other top corporate officials) has grown enormously, and continues to grow, while worker wages have remained virtually stagnant. In other words, top corporate officials and stockholders are hogging all the the increased productivity, and not allowing workers any of it. This contributes to the already enormous inequality in wealth in income in this country, making it worse.

Dean Baker, Josh Bivens, and Jessica Scheider of the Economic Policy Institute have written an excellent article on this. Here is just a tiny portion of it:

What this report finds: Since the 1970s, rapidly accelerating CEO pay has exacerbated inequality in the United States: High CEO pay generates pay increases for other high-level managers, while pay at the middle and bottom of the wage distribution continues to be depressed. Increasing CEO pay is not actually linked to an increase in the value of CEOs’ work; instead, it is more likely to reflect CEOs’ close ties with the corporate board members who set their pay. While corporate boards technically report to shareholders, shareholders are not particularly well positioned to put pressure on directors to restrain CEO pay.

Why it matters: CEO pay is not just a symbolic issue. High CEO pay spills over into the rest of the economy and helps pull up pay for privileged managers in the corporate and even nonprofit spheres. Because pay for top managers—CEOs and others—is not driven by their contributions to economic growth, this pay can be reduced and others’ incomes boosted if we can figure out a way to restrain CEOs’ market power. Importantly, the most direct damage done by excess CEO pay is to shareholders. Since shareholders are a relatively privileged group themselves (if not as privileged as CEOs), they could potentially wield power in this situation; policymakers should try to figure out how to enlist shareholders in the fight to restrain excess managerial pay.

What can be done about it: Policies should be passed that boost both the incentive for and the ability of shareholders to exercise greater control over excess CEO pay. Tax policy that penalizes corporations for excess CEO-to-worker pay ratios can boost incentives for shareholders to restrain excess pay. To boost the power of shareholders, fundamental changes to corporate governance have to be made. One key example of such a fundamental change would be to provide worker representation on corporate boards. Finally, as a starting point, the Securities and Exchange Commission (SEC) should change the reporting requirements for corporations calculating their CEO-to-worker pay ratios to make them consistent over time and across firms; this will make these ratios far more useful to policymakers and the public.

Key findings of this report

Excessive CEO pay exacerbates inequality. By now the explosive growth of CEO pay in large firms—relative to typical workers’ pay and even the pay of other members of the top 0.1 percent of the wage distribution—has been well documented. This excessive CEO pay matters for inequality, not only because it means a large amount of money is going to a very small group of individuals, but also because it affects pay structures throughout the corporation and the economy as a whole. If a CEO is earning $20 million, then it is likely many other high-level executives are also being paid in the millions.

There are probably even broader spillover effects in labor markets that should not necessarily be all that tightly linked to executive pay, but that are linked through norms and bargaining power that allow privileged actors in other sectors to “benchmark” their salary growth to CEO pay. Many directors of well-funded nonprofit institutions or colleges and universities, for example, once worked in the corporate sector and have seen their pay rise as corporate director pay rises.

Increasing CEO pay is not linked to increasing CEO productivity. The explosion of pay for CEOs of large firms is not strongly associated with evidence that these CEOs have become far more productive in their ability to generate returns to shareholders.

Weak corporate governance is a large part of the problem. Research has demonstrated that CEOs are rewarded for luck and that weak corporate governance—boards of directors more concerned with hanging onto their own positions than with advocating for the best interests of shareholders—fails to restrain CEO pay by subjecting it to serious competition.

Shareholders are not well positioned to hold corporate boards accountable.Reforming corporate governance to empower shareholders to rein in CEO pay will require policy changes that overcome a host of bad incentives and agency problems that currently keep boards of directors from working on behalf of shareholders. Essentially, the market for good corporate governance is plagued by externalities—costs or benefits faced by actors not directly involved in the corporate governance decisions. For example, because a large share of the benefits stemming from activist shareholders spending resources to try to discipline CEO pay will accrue not to the activists, but instead to the lazier group of shareholders who do not spend resources in this effort, the gains from activism are substantially muted. Similarly, the excess pay for CEOs at firms with particularly poor corporate governance puts upward pressure on pay for CEOs at firms whose shareholders do spend resources on good corporate governance, thereby reducing the payoff to these efforts.

Tax penalties or incentives may be helpful in restraining CEO pay, if complemented with corporate governance reforms. A number of proposals for reining in CEO pay through tax penalties or incentives have been introduced in recent years. These proposals have merit, but they would need to be complemented with corporate governance reforms to be effective in restraining CEO pay growth.

• These proposals effectively highlight how broken the market for top corporate managers is. They also highlight that the root of growing American inequality in recent decades is the labor market, with typical workers seeing anemic wage growth while their bosses see much more rapid pay growth.

• Tax penalties may raise revenue, but they’re unlikely to change corporate behavior without corporate governance reforms. In the current corporate governance environment, tax penalties pegged to excessive CEO pay have the potential to raise tax revenue and shine a spotlight on the broken market for CEO pay. But to make firms’ owners (the shareholders) responsive to these incentives—i.e., to get them to actually reduce CEOs’ pay—tax penalties must be paired with complementary efforts to empower these owners through corporate governance reform.

• Shareholders have an incentive to restrain CEO pay, but they are not well positioned to do so. Elevated CEO pay largely comes at the expense of shareholders. This means that these shareholders already have incentive to prevent large increases in CEO pay, yet this pay has risen enormously in recent decades. The key problem is not that shareholders lack incentive to restrain pay, but rather that the current corporate governance structure leaves control largely in the hands of boards of directors who owe their allegiance to CEOs rather than to shareholders.