The Significant Increase in CEO Remuneration: Witnessing a 1,000% Boost in Executive Salaries since 1978.
It's no illusion that CEO compensation has significantly outpaced regular worker salaries throughout the years.
The income of CEOs at major U.S. corporations skyrocketed an astounding 1,085% from 1978 to 2023, while a typical employee's salary only increased by a mere 24%, according to the Economic Policy Institute, a nonpartisan research organization.
CEOs earned approximately $1.87 million annually in 1978, which climbed to a staggering $22.21 million by last year. Meanwhile, private-sector workers saw a much less spectacular increase: their annual income grew from $57,000 to $71,000 over the same approximately half a century, adjusted for inflation.
In 2023, CEOs earned 290 times the salary of an average worker, a significant jump from 1965, when their compensation was only 21 times that of a typical employee.
The EPI report stated, "CEOs are getting paid more because of their leverage over corporate boards, not because of their skills or contributions they make to their firms." "Exorbitant CEO pay has contributed to rising inequality in recent decades as it has likely pulled up the pay of other top earners—concentrating earnings at the top and leaving fewer gains for ordinary workers."
Stock-Based Pay
The massive growth in CEO compensation in the past few decades can be traced back to a seemingly insignificant tax policy change in the 1990s. The intention behind this change, meant to curb excessive executive salaries, inadvertently paved the way for even more lucrative compensation packages, drastically altering the structure of corporate compensation.
To address rising concerns about exorbitant executive salaries, U.S. legislators implemented a cap on the tax deductibility of these payments. However, this well-intentioned policy move led to an unexpected consequence: companies switched to alternative forms of compensation, such as stock options and other equity-based rewards, which were not subject to the same tax limitations. This shift to equity-based compensation not only bypassed the salary cap but also made CEO pay more closely linked to company performance—at least theoretically. The unfortunate consequence was a rapid increase in CEO earnings, as stock market gains inflated the value of these new compensation packages, far surpassing the growth of average worker wages.
Although a CEO's primary goal is often to boost shareholder value, the relationship between stock performance and executive pay is more complex and often detached from individual merit or company-specific achievements.
CEO compensation is not necessarily contingent on improved individual productivity or company performance. Instead, it is mainly influenced by broader market trends. When the stock market as a whole enjoys an upturn, CEO pay generally takes off, regardless of the specific performance of their individual companies. This phenomenon suggests that many CEOs are benefiting from general market momentum rather than their unique strategic decisions or leadership skills.
As a result, CEOs can reap substantial rewards even when their companies' performance is merely average or below par compared to their industry peers. This disconnect imposes questions about the fairness and effectiveness of current executive compensation models, given the increasing wage gap between CEOs and average workers.
The research suggests that escalating executive compensation is not a result of increased value in their skills or contributions to company productivity. Rather, it appears to be a consequence of CEOs leveraging their influential positions to determine their own pay scales.
“CEO compensation does not appear to reflect the greater productivity of executives, but their ability to extract concessions from corporate boards—thanks to dysfunctional systems of corporate governance in the United States,” the report stated.
The EPI challenges the belief that CEOs of major corporations possess such exceptional abilities that they deserve to be compensated far beyond other top earners. It contends that it is unlikely for the skills of these executives to be so extraordinarily superior and unrelated to those of other high-achieving professionals that it justifies their earnings surpassing the vast majority within the top 0.1% income bracket.
Reducing CEO Pay
CEO compensation is now shifting towards stock awards rather than stock options, potentially aligning executive pay with long-term company performance. However, this shift might not be sufficient to address the widening disparity between CEO and worker pay, prompting calls for more extensive policy reforms to curb excessive executive compensation.
In recent years, there has been a discernible transition in the components of CEO pay packages. While equity-based components still dominate total compensation, the composition of these stock-related rewards has evolved. Stock options comprised over 70% of realized CEO compensation in 2006. By 2023, this figure had significantly decreased to 22%, while vested stock awards accounted for the remaining 78%, EPI data shows.
This shift towards stock awards is viewed positively, as it may encourage CEOs to focus on long-term company performance rather than short-term stock price manipulation.
Despite these changes, many argue that additional safeguards are required to address the growing chasm between executive and worker pay. Without further protection, the U.S. risks becoming a “winner-take-all” society where wealth is increasingly concentrated at the top.
Proposed policy interventions include reinstating higher income tax rates for top earners, using tax policy to discourage excessive CEO pay, strengthening the binding nature of shareholder votes on executive compensation, and employing antitrust measures to limit the market power of large corporations.
In light of these findings, there's a pressing need for CEOs to demonstrate leadership in addressing this wage gap. They could start by advocating for fairer compensation structures within their corporations.
Moreover, promoting career opportunities for employees and fostering a culture of shared prosperity can contribute to reducing the disparity between executive and worker salaries. This leadership approach, coupled with policy interventions, could pave the way towards a more equitable business landscape.
