The Meteoric Rise In CEO Compensation

The Meteoric Rise In CEO Compensation

It’s not your imagination. CEO compensation has dramatically risen compared to average worker pay. Over the past few decades, the disparity has become particularly pronounced since the 1980s and 1990s. 

The Economic Policy Institute's study tracking the CEO-to-worker compensation ratio from 1965 to 2023 illustrates this trend vividly. In 1965, CEOs were paid only 21 times as much as a typical worker. By 2000, this ratio had skyrocketed to 384-to-. After some fluctuations, it stood at 290-to-1 in 2023. This represents a staggering 1,085% increase in CEO compensation since 1978— compared to just a 24% increase for typical workers.

A number of factors contributed to this dramatic rise in CEO pay. One significant change occurred in the 1990s when a cap was placed on the tax deductibility of executive salaries. This inadvertently led companies to shift towards stock options and other forms of compensation. The result was a dramatic increase in total CEO compensation. 

Globalization and technological advancements has allowed companies to scale significantly. This trend offered a justification for higher CEO pay. The thought process was that CEOs had increased responsibilities and improved the company’s value so the payouts were deemed to some as reasonable. 

There are many who criticize the extravagance payouts. It’s not only the salary and stock. They are awarded generous perks such as having a private jet at their disposal, This increase in CEO compensation does not necessarily reflect a commensurate increase in skills or productivity. It seems that they are more closely tied to CEOs' growing power to influence their own pay through corporate boards.

The implications of this trend are far-reaching. The enormous disparity between CEO and worker pay has contributed significantly to overall income inequality, concentrating earnings at the top and leaving fewer gains for ordinary workers. This growing gap raises questions about fairness, economic efficiency, and the long-term sustainability of such a system. 

The fact that CEO pay has outpaced even that of other very high earners (such as the top 0.1% of wage earners) suggests that this is not simply a reflection of broader trends in high-skill compensation.

 Detractors of this trend call for hitting the CEOs with higher income tax rates for top earners, making shareholder votes on CEO compensation more binding, and  using antitrust measures to limit market concentration, and creating tax incentives for lower CEO pay.