CEOs now earn 320 times as much as a typical worker.
According to a pre-pandemic study from the Economic Policy Institute, a left-leaning think tank, CEO compensation surged 14% in 2019 to $21.3 million, which means CEOs now earn 320 times as much as a typical worker. Actually, 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 late 1970s.
In 2019, a CEO at one of the top 350 firms in the U.S. was paid $21.3 million on average (using a “realized” measure of CEO pay that counts stock awards when vested and stock options when cashed in rather than when granted). This 14% increase from 2018 occurred because of rapid growth in vested stock awards and exercised stock options tied to stock market growth.
Why? The study’s authors say CEOs are getting more because of their power to set pay—and because so much of their pay (about three-fourths) is stock-related, not because they are increasing productivity or possess specific, high-demand skills. Also because corporate boards running America’s largest public firms are giving top executives outsize compensation packages that have grown much faster than the stock market and the pay of typical workers, college graduates, and even the top 0.1%.
Can it change? It has for many years. The CEO-to-worker compensation ratio was 21-to-1 in 1965. It peaked at 366-to-1 in 2000. In 2019 the ratio was 320-to-1, up from 293-to-1 in 2018. But the compensation seen right now can be solved by enacting policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so, however, some economists are forecasting a “K-shaped” recovery, with great implications for commercial real estate, where those at the top get richer and those at the bottom fall even further behind.
According to the report by the Economic Policy Institute, some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no consequences for the vast majority of workers. However, the escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, generating widespread inequality. Although the analyses in this report predate the economic shock of the coronavirus pandemic, there is a renewed focus on CEO pay because so many American workers are out of work or have seen their hours or wages cut. The report concludes saying that if CEO pay growing far faster than that of other high earners is evidence of the presence of rents, as Kaplan suggests, one would conclude that today’s top executives are collecting substantial rents, meaning that if they were paid less there would be no loss of productivity or output in the economy.
