Each year, US corporations are required to report the pay for their chief executive officers, and also to report the ratio of CEO pay to the pay of the median worker at the company. Lawrence Mishel and Jori Kandra report the results for 2019 pay in "CEO compensation surged 14% in 2019 to .3 million: CEOs now earn 320 times as much as a typical worker" (Economic Policy Institute, August 18, 2020). Back in the 1970s and 1980s, it was common for CEOs to be paid something like 30-60 times the wage of a typical worker. In 2019, the ratio was a multiple of 320. A result of this shift is that while CEOs used to be paid three times as much as the top 0,1% of the income distribution, now they are paid about six times as much. What is driving this higher CEO pay ratio? In an immediate sense, the
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Back in the 1970s and 1980s, it was common for CEOs to be paid something like 30-60 times the wage of a typical worker. In 2019, the ratio was a multiple of 320.
A result of this shift is that while CEOs used to be paid three times as much as the top 0,1% of the income distribution, now they are paid about six times as much.
What is driving this higher CEO pay ratio? In an immediate sense, the higher pay seems to reflect changes in the stock market. The left-hand margin shows CEO pay; the right-hand margin shows the stock market as measured by the S&P 500 index.
This rise in CEO/worker pay ratios has led to a continually simmering argument about the underlying causes. Does the rise reflect the market for talent, in the sense that that running a company in a world of globalization and technological change has gotten harder, and the rewards for those who do it well are necessarily greater? Or does it reflect a greater ability of CEOs to take advantage of their position in large companies to grab a bigger share of the economic pie? One's answer to this question will turn, at least in part, on whether you think CEOs have played a major role in the rise of the stock market since about 1990, or whether you think they have just been riding along on a stock market that has risen for other reasons. For an example of this dispute from a few years ago in the Journal of Economic Perspectives (where I work as Managing Editor), I recommend:
Without trying to resolve that dispute here, I'd offer this thought: Notice that pretty much all of the increase in CEO/worker pay ratios happened in the 1990s, and the ratio has been at about the same level since then. Thus, if you think that the market for executive talent was rewarding CEOs appropriately, you need an explanation for why the increase happened all at once in about a decade, without much change since then. If you think the reason is that CEOs are grabbing a bigger share of the pie, you need an explanation for why CEOs became so much more able to do that in the 1990s, but then their ability to grab even-larger shares of the pie seemed to halt at that point. To put it another way, when discussing a change that happened in the 1990s, you need an explanation specific to the 1990s.