Excessive CEO Pay Takes Money Away from Other Workers

The op-ed provides a good analysis of the problem with the economic structures that allow CEOs to be excessively overpaid — the substantial amount of money that the CEOs are overpaid with could instead be going to other lower-level workers. Wages in the United States have hardly increased in decades for most American workers, and the CEO pocket money would make a significant difference in their lives.

The problem is the structure of corporate governance. The people who most immediately determine the CEO’s pay are the corporation’s board of directors. These directors have incredibly cushy jobs. They typically get paid several hundred thousand dollars a year for perhaps 150 hours of work.

Members of corporate boards largely owe their jobs to the CEOs and top management. They almost never get booted out by shareholders; the reelection rate for board members running with board support is over 99 percent.

In this context, board members have no incentive to ask questions like, “Could we get someone as good as our CEO for half the pay?” There is basically no downward pressure on CEO pay and every reason to boost pay. After all, if you were sitting on some huge pot of other people’s money, wouldn’t you want to pay your friends well?

Of course, the CEO pay comes at the expense of returns to shareholders, and these have not been very good in recent years in spite of the best efforts of Trump and the Republicans to help them with tax cuts and pro-business regulation. In the last two decades, stock returns have averaged less than 4.7 percent annually above the rate of inflation. By contrast, in the long Golden Age from 1947 to 1973, real stock returns averaged 8.2 percent.

With the bulk of stock being held by the richest people in the country, there is no reason to shed tears for stockholders, but the fact is they are being ripped off by CEOs and other top management. Given the choice, we should prefer the money ends up in the hands of shareholders rather than CEOs. After all, people below the top 1 percent do own stock in their 401(k)s, as do public and private pension funds. By contrast, every dollar in additional CEO pay is going to someone in the top 0.001 percent of the income distribution.

More important than the money going to the CEOs is the impact that their outlandish pay has on pay structures in the economy more generally. When the CEO is pocketing $20 to $30 million a year, other top executives are likely earning close to $10 million and even the third-tier managers might be topping $1 million.

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If a successful CEO of a large company was pocketing $2-3 million a year, instead of $20 to $30 million, the ripple effect on the pay of others near the top would leave much more money for everyone else. This gives us very good reason to worry about excessive CEO pay.

If the structure of corporate governance makes it too difficult for shareholders to collectively act to limit CEO pay, threatening them with a return to the pre-Trump 35 percent tax rate might give them enough incentive to get the job done. It has always been in the interests of shareholders to pay their CEOs as little as possible, just as they want to pay as little as possible to their other employees.

If shareholders pay a CEO $20 million more than needed to get someone to run the company, it has the same impact on the bottom line as paying $2,000 extra to 10,000 workers. No company deliberately overpays their frontline workers.

CEO-Worker Income Discrepancy is the Worst in the U.S.

When the massive upwards redistribution of income to the top 1% over the last four decades is mentioned, CEO pay should be noted as one of the prime causes of it. Essentially, CEOs have been taking an exorbitant amount of the income share of many workers and shifting it into their own pockets.

As corporations and wealthy individuals across the United States are slated to benefit from massive tax breaks thanks to the GOP’s latest tax legislation, a Bloomberg analysis published Thursday found that chief executives of American companies already make 265 times the amount of money an average worker is paid—the largest CEO-worker income gap in the world.

“CEOs of the biggest publicly traded U.S. companies averaged $14.3 million in annual pay, more than double that of their Canadian counterparts and 10 times greater than those in India,” according to Bloomberg. While India ranked second on Bloomberg‘s CEO pay-to-average income ratio, Indian chief executives made about a tenth of their American counterparts’ incomes, averaging $1.46 million annually.

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Last year’s CEO-to-worker compensation ratio, calculated by the Economic Policy Institute (EPI), was 271-to-1, with the chief executives of American companies seeing an average of $15.6 million in annual compensation. The EPI report, which was published in July, notes that “regardless of how it’s measured, CEO pay continues to be very, very high and has grown far faster in recent decades than typical worker pay,” and “exorbitant CEO pay means that the fruits of economic growth are not going to ordinary workers.”

EPI president Lawrence Mischel and research assistant Jessica Schieder found that CEO compensation rose “by 807 or 937 percent (depending on how it is measured—using stock options granted or stock options realized, respectively) from 1978 to 2016.” They argue that “exorbitant CEO compensation…has fueled the growth of the top 1 percent incomes” at the expense of “the vast majority of workers.”

“Simply put, money that goes to the executive class is money that does not go to other people. Rising executive pay is not connected to overall growth in the economic pie,” Mishel explained, as Common Dreams previously reported. “We could curtail the explosive growth in CEO pay without doing any harm to the economy.”

In response to their findings in July, Mishel and Schieder proposed the following policy solutions:

  • 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.