CEO compensation compared to average workers

It is a widely held belief that workers are paid "what they're worth" or "what they deserve" -- that there is some kind of automatic or natural force in the labor economy that sets a fair and appropriate level of compensation for every job. Therefore, the thinking goes, workers should just accept what they're paid and not dispute it.  

Certainly factors such as the supply and demand for a particular skill play an important role in setting compensation levels. But this article on CEO compensation from the Economic Policy Institute shows that there are other powerful factors at work that can often influence compensation. One conclusion from the article illustrates this: 

"This means that CEOs are getting more (compensation) because of their power, not because they are more productive, or have special talent, or more education."

Though the power to influence compensation may not be as great in most jobs as it is for top executives, who often literally set their own pay, it nonetheless plays a significant role. Look at how unionized workers out-earn their non-union counterparts. 

It is my belief that negotiating power has come to play much too big a role in setting compensation and needs to be reined in. The average worker, like the average citizen, has lost so much power of late that wage levels for lower and middle class jobs lag far behind, especially considering the gains in education and technology that make workers today more productive. The unwillingness of Congress year after year to raise the now poverty level minimum wage typifies the problem. Powerless workers continue to get squeezed, while unrestrained executives rake in more and more.  


Article Summary:

What this report finds: In 2015, CEOs in America’s largest firms made an average of $15.5 million in compensation, which is 276 times the annual average pay of the typical worker. While the CEO-to-worker compensation ratio is down from 302-to-1 in 2014, it is still light years beyond the 20-to-1 ratio in 1965. The drop in 2015 primarily reflects a dip in the stock market and not any change in how CEO pay is being set. Therefore, CEO pay can be expected to resume its sharp upward trajectory when the stock market resumes rising.

Why it matters: Exorbitant CEO pay means that the fruits of economic growth are not going to ordinary workers since the higher pay does not reflect correspondingly higher output. From 1978 to 2015, inflation-adjusted CEO compensation increased 940.9 percent, 73 percent faster than stock market growth and substantially greater than the painfully slow 10.3 percent growth in a typical worker’s annual compensation over the same period.

How we can solve the problem: CEO pay is growing a lot faster than profits, the pay of the top 0.1 percent of wage earners, and the wages of college graduates. This means that CEOs are getting more because of their power, not because they are more productive, or have special talent, or more education. If CEOs earned less or were taxed more, there would be no adverse impact on output or employment. Policy solutions that would limit and reduce incentives for CEOs to extract economic concessions without hurting the economy include:

  • Reinstate higher marginal income tax rates at the very top
  • Remove the tax break for executive performance pay
  • Set corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation
  • Allow greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.
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