CEOs: They used to be just like us. Well, at least a lot more like us. Thirty years ago, the average chief executive of a large public company earned less than 30-times more than the typical worker. But today they rake in between 202 and 273-times the pay, as shown in the graph below from a new Economic Policy Institute paper. (The precise number depends on whether you count the stock options they’re awarded during a year towards pay, as in the light blue line, or the stock options they cash in, shown via the dark blue line.)
It’s not hard to figure out why CEO pay has bounced back as of late. The job market certainly hasn’t fully recovered from the recession, but corporate profits have been on a tear along with share prices. And since the 1980s, executive compensation has been pretty tightly correlated with the stock market’s performance. When investors do well, management does well.
The bigger question, the one you could spend many thousands of words investigating, is why CEO pay packages have become so handsome in the first place. I’m not about to offer a definitive answer to that question, but the EPI report does add an interesting wrinkle to the debate.
There are two large camps on this issue. On the one hand, you have those who believe that in a world of competing multinational corporations, CEO’s have simply become more valuable than ever. Companies are larger and generate more wealth. When executives fail—as Derek Thompson has noted—their incompetence affects more lives than perhaps ever before. Proponents of this view often note that while CEO compensation has jumped, so too have earnings for other highly talented professionals who have large sums of money riding on their abilities. In a globalized economy, skills are simply worth more than ever.
The other side, which includes more liberal organizations like EPI and the Center for American Progress, tend to subscribe to a theory known as “management power.” CEO’s, they say, essentially have so much sway over their corporate boards that they can set their own pay packages, often with assistance from compliant compensation consultants. I’m simplifying a lot, but that’s the gist.
Now back to the EPI’s report. It turns out, CEOs aren’t just pulling away from average workers; they’re pulling away from the rest of the elite as well. Chief execs at large companies are now making 4.7 times what other workers in the top 0.1 percent of wage earners bring in, up from an average ratio of about 3-to-1 that prevailed through 1979. Now, I wouldn’t say this makes a slam dunk case that executives are inflating their own pay beyond reason. It might just be that, these days, CEOs are truly becoming more valuable compared to even other highly educated, highly accomplished professionals with high stakes jobs. But it does re-enforce the idea that something different is going on in the c-suite than in the rest of the economy. And whatever it is might be reason for outrage.
Jordan Weissmann is an associate editor at The Atlantic. He has written for a number of publications, including The Washington Post and The National Law Journal.