The CEO To Worker Pay Ratio Is Far Too Large

The chart above reflects numbers from the Economic Policy Institute. It shows the CEO to worker pay ratio. The worker pay used to figure the ratio is about $69,700. More than 50% of all workers are paid less than that, and about 25% of workers make minimum wage (or close to it). Thanks to Republican economic policy, this ratio has gotten far too large. The rich are getting much richer in our society, while workers struggle to just keep up with inflation. This must change, but it won't until the Republicans are voted out of power.

Here is just a small part of what the Economic Policy Institute has to say about it:

Chief executive officers (CEOs) of the largest firms in the U.S. earn far more today than they did in the mid-1990s and many times what they earned in the 1960s or 1970s. They also earn far more than the typical worker, and their pay—which relies heavily on stock-related compensation—has grown much more rapidly than a typical worker’s pay. Importantly, rising CEO pay does not reflect rising value of skills, but rather CEOs’ use of their power to set their own pay. In economic terms, this means that CEO compensation reflects substantial “rents” (income in excess of their actual productivity). This is problematic since this growing earning power of CEOs has been driving income growth at the very top, a key dynamic in the overall growth of inequality.

Key findings

• Growth of CEO compensation (1978–2020). Using the realized compensation measure, compensation of the top CEOs increased 1,322.2% from 1978 to 2020 (adjusting for inflation). Top CEO compensation grew roughly 60% faster than stock market growth during this period and far eclipsed the slow 18.0% growth in a typical worker’s annual compensation. CEO granted compensation rose 970.2% from 1978 to 2020.
• Growth of CEO compensation during the pandemic (2019–2020). The dramatic increase in CEO compensation during the pandemic is remarkable. While millions were out of work, CEOs’ realized compensation jumped 18.9% in just one year. Typical worker compensation, of those who remained employed, did rise 3.9% over that year—and even that wage growth is overstated: Perversely, high job loss among low-wage workers skewed the average wage higher.
• Changes in the CEO-to-worker compensation ratio (1965–2020). Using the realized compensation measure, the CEO-to-worker compensation ratio was 21-to-1 in 1965. It peaked at 366-to-1 in 2000. In 2020 the ratio was 351-to-1. Most important, the ratio was far higher than at any point in the 1960s, 1970s, 1980s, or 1990s. Using the CEO granted compensation measure, the CEO-to-worker compensation ratio rose to 203-to-1 in 2020, significantly lower than its peak of 386-to-1 in 2000 but still many times higher than the 45-to-1 ratio of 1989 or the 15-to-1 ratio of 1965.
• Changes in the composition of CEO compensation. The composition of CEO compensation is shifting away from the use of stock options and toward the use of stock awards. Vested stock awards and exercised stock options totaled $20.1 million in 2020 and accounted for 83.1% of average realized CEO compensation.
• Changes in the CEO-to-top-0.1% compensation ratio. Over the last three decades, compensation grew far faster for CEOs than it did for other very highly paid workers (the top 0.1%, or those earning more than 99.9% of wage earners). CEO compensation in 2019 (the latest year for which data on top wage earners are available) was 6.44 times as high as wages of the top 0.1% of wage earners, a ratio 3.26 points greater than the 3.18-to-1 average CEO-to-top-0.1% ratio over the 1947–1979 period.
• Implications of the growth of CEO-to-top-0.1% compensation ratio. The fact that CEO compensation has grown far faster than the pay of the top 0.1% of wage earners indicates that CEO compensation growth does not simply reflect a competitive race for skills (the “market for talent”) that also increased the value of highly paid professionals: Rather, the growing pay differential between CEOs and top 0.1% earners suggests the growth of substantial economic rents (income not related to a corresponding growth of productivity) in CEO compensation. CEO compensation appears to reflect not greater productivity of executives but the power of CEOs to extract concessions. Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on the economy’s output or on employment.
• Growth of top 0.1% compensation (1978–2019). Even though CEO compensation grew much faster than the earnings of the top 0.1% of wage earners, that doesn’t mean the top 0.1% did not fare well. Quite the contrary. The inflation-adjusted annual earnings of the top 0.1% grew 341% from 1978 to 2019. CEO compensation, however, grew three times as fast!
• CEO pay growth compared with growth in the college wage premium. Over the last three decades, CEO compensation increased more relative to the pay of other very-high-wage earners than did the wages of college graduates relative to the wages of high school graduates. This finding indicates that the escalation of CEO pay does not simply reflect a more general rise in the returns to education.