The CEO-to-worker pay gap has expanded exponentially over the past several decades.
The Economic Policy Institute (EPI) estimates that CEO compensation has grown 1,322% since 1978, while typical worker compensation has risen just 18%. In 2020, CEOs of the top 350 firms in the U.S. made $24.2 million, on average — 351 times more than a typical worker.
A 2019 Institute for Policy Studies report estimates that 80% of S&P 500 companies pay their CEO over 100 times more than they pay their median worker. That means it would take 100 years for the average employee at one of these companies to earn what their CEO makes in a year.
This kind of inequality is creating anxiety for families across the country and across the political spectrum. According to Pew, a majority of Americans think future generations will be financially worse off.
CNBC Make It recently spoke with Lawrence Mishel, a distinguished fellow at the EPI about why the CEO-to-worker pay gap is expanding and what happens if nothing is done to close it.
How did we get here?
“CEO compensation took off a lot in the 1990s. It did so as the stock market boomed and it’s basically a market that I believe is out of control. It’s what you could call a Lake Wobegon market,” says Mishel, referencing the NPR show “A Prairie Home Companion” which included a regular segment from host Garrison Keillor called “The News from Lake Wobegon,” a fictional town “where all the women are strong, all the men are good-looking, and all the children are above average.”
Mishel’s point is that everyone in Lake Wobegon thinks they’re above average, just as every company thinks that their CEO should be compensated above average.
“Firms believe that they’re an important place and they want a great executive. And if you have a great executive, then they certainly should be paid above average,” explains Mishel. “Now, if every firm decides that they’re going to pay their executive above average, and you look at what the pay of other executives are in firms similar to yours and you make sure that it’s more, over time, it just ratchets up and up and up and up.”
However, Mishel points out that salary makes up a relatively modest percentage of how much CEOs typically earn.
“CEO compensation in our study reflects wages, bonuses and long-term incentives, but most importantly, the stock options that a CEO has cashed in each year, as well as any invested stock,” he says. “Stock-related compensation comprises around 85% of CEO compensation.”
Stock-related compensation is a key reason why CEOs earn so much more than even high earners.
“It used to be that in the 1950s, 60s, and 70s, CEOs made 3.3 times what a top 0.1% earner made. Now, it’s more than six times,” says Mishel. “CEOs now are making 351 times that of a typical worker, but back in 1978, it was only 31 times. In 1989, it was 61 times.”
Mishel also mentions six potential reasons for why typical worker wages have not increased as quickly as typical CEO compensation: high unemployment (which forces workers into accepting the lowest wages possible), globalization (which allows companies to find the cheapest workers in the world), the erosion of unions (which makes it harder for workers to collectively bargain), low labor standards (including a low minimum wage), the increase in non-compete clauses (which makes it hard for workers to find better wages in their industry) and domestic outsourcing (like shifting to a workforce of freelancers).
“Wages and benefits have not grown very much in the last 40 years. It has grown far less than what the economy produced,” he says, referencing research that found worker productivity has increased 3.5 times faster than average worker pay since the late 1970s.
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