CEOs now earn 320 times more than average workers

Robert Reich, the U.S. Secretary of Labor under Bill Clinton, tweeted Tuesday: “Capitalism is off the rails.” That was in reaction to a new report from the Economic Policy Institute (EPI), which found that the average CEO compensation in 2019 at one of America’s top 350 firms was $21.3 million, up by 14% from the year prior—and up 1,167% from 1978. A typical worker at one of these top companies now earns $67,000 per year.

This “exorbitant” CEO pay is a problem principally because it contributes to a widening gap between those top executives’ wages and those of typical employees. The inequality has consistently increased over the past half century: the ratio of CEO to worker earnings has soared from 21-to-1 in 1965, to 61-to-1 in 1989, to 320-to-1 in 2019.

One of the key distinctions in this year’s report is a slightly different metric on calculating total income. CEO pay now relies heavily on stock options and awards, which are pegged to the company’s stock price and increase in value if the company’s stock grows more valuable. Rather than using a “guess” of the future value of the payout when granted to the employee, as has been the norm in the past, this report uses the actual value when the option is cashed or award is vested. That makes for a more accurate figure, says Lawrence Mishel, distinguished fellow at and former president of the EPI, who worked on the report with research assistant Jori Kandra.

Because the value of these stock options and awards are tied to the stock market, CEO earnings have followed the decades-long rise of the market. They peaked in 2000 with the stock market bubble, reaching an all-time high of $21.9 million, and a CEO-to-worker ratio of 393 to 1; 2019’s figure is the highest since 2000.

But they also follow an upward trend because of competition. Companies establish pay committees, which base their CEOs’ pay on that of similar firms; if they lower the figure, they risk losing their CEO to rivals. “You end up ratcheting up the pay of executives all across the economy, and that ends up [being] a lot of money,” Mishel says.

Another key metric that Mishel used was the comparison to the top 0.1% of earners, those workers that are a rung below the CEO, to dispel the argument that top employees are compensated fairly and proportionally based on their education, talent, and productivity. He found that CEOs were still earning six times more than those top workers, placing them in a “totally different universe,” Mishel says. While those high-wage earners’ incomes have grown 337% between 1978 and 2018, CEO pay has gone up by 1,167%. In that same period, average workers’ incomes grew by just 13.7%.

Because of the companies’ pay committees and inter-business competition, it’s highly unlikely that there’s a private solution to the problem. “I think you can imagine some large changes in corporate governance,” Mishel says. “but I don’t think a couple of do-good firms are going to change the market.”

Instead, the focus should be policy solutions, the report suggests, and specifically on raising taxes on the wealthy. That includes higher marginal income tax rates, so that those surplus stock options and awards are fairly taxed; corporate taxes for firms that have higher CEO-to-worker compensation ratios; and “luxury taxes,” or taxes on every dollar paid out over a set cap.

In addition to taxation, the government could pass laws to change corporate governance structures, to allow the formation of broader coalitions of stakeholders that could offer a countervailing force to executives’ pay demands. Mishel mentions the merit of Elizabeth Warren’s Accountable Capitalism plan, under which corporations be required to reserve 40% of board seats for employees. The report also proposes “say on pay” systems, where shareholders would actively vote on CEO compensation.

Mishel remains optimistic that there will be a new Congress that will enact “bold policies,” particularly those that shift toward higher wealth taxes. “These are very, very popular, and I think the country needs the money,” he says. “That’s going to be the first place they’re going to get it.”