CEO compensation drives income inequality - Activate World

CEO compensation drives income inequality

According to the New York Times, CEO pay increased at almost twice the rate of ordinary wages. In 2018 — a good year for the labor market — the average American private-sector worker got a 3.2 percent raise, or an extra 84 cents per hour. 

Equilar conducts a survey for the New York Times of the 200 highest-paid chief executives in America. In 2018, the Times’ analysis shows that the median CEO received compensation of $18.6 million — an increase of $1.1 million, or 6.3 percent, from the year before. This study suggests that income inequality, which has exploded in recent decades, shows no signs of slowing down.

Lunchtime Conversations:

  • Now that public companies are mandated to disclose pay ratios between the CEO and employees, what valid justifications can be made for the pay disparities?
  • What government or business policy would correct the pay disparity ratios?
  • According to an international survey, the ideal CEO-to-worker salary ratio is 4.6 to 1, while the estimated average CEO-to-worker salary ratio among S&P 500 companies is 373 to 1. Could greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation, help control corporate income inequality?

Noteworthy:

  • Beyond a set salary, CEOs’ compensation packages include bonuses, company stock options, and long-term incentive payouts, which can vary based on performance and the status of the stock market.
  • According to the nonprofit think tank, Economic Policy Institute (EPI), CEO pay rose about 1,000 percent between 1978 and 2017 — faster than stock prices, corporate profits, and worker pay. In other words, rising C-suite salaries are not benefiting companies or their workers.
  • In 2018, Tesla approved a pay package to Elon Musk valued at as much as $2.3 billion. The largest ever, Musk’s compensation package is directly tied to the long-term success of Tesla and its shareholders.

Storyline:

These salary increases are in spite of recent efforts to moderate C.E.O. pay. In 2015, Congress required that companies disclose the ratio of their chief executive’s pay to that of their median employee beginning in 2018. Lawmakers also gave shareholders a special but nonbinding vote on the matter. 

Another trend contributing to accountability is that company boards, under pressure from some shareholders and advisory firms, have tied a lot more of a chief executive’s pay to a company’s performance. But this action has been problematic due to confusion about how performance is measured. Researchers found that companies that make big adjustments to measures of profit tend to pay their CEOs more, by an average of 16%, than other companies. 

Economists say excessive CEO pay was a major reason why the share of income earned by the top 1 percent doubled from 1979 to 2007. They point out that CEO pay has grown faster than corporate profits, and faster than overall gains in the stock market.

Dr. Ozge Uygur, associate professor of accounting and finance at Rohrer College of Business, reviewed S&P 500 companies and found the average CEO-to-worker compensation averaged 244-to-1 between 1998 and 2016.  

In reviews of the top 350 corporations by sales, the CEO-to-worker pay ratio has hovered in the 300-to-1 range since 2000. CEO compensation includes stock options, stock rewards, and bonus pay, and the combination represents an over 1,000 percent increase in CEO compensation between 1979 and 2017. 

Why is CEO pay rising so dramatically? According to Equilar’s director of Research, Courtney Yu, “It’s a combination of a few factors, namely increased responsibilities over growing companies and higher than median pay to attract higher-level talent.”

Sources: Capitalism Has a Big ProblemThe New York TimesThe Wall Street JournalVox, Washington Post

Photo by Marten Bjork on Unsplash