CEO Compensation and America's Growing Economic Divide

By Tina RuhlowLast Updated Dec 8, 2020 3:48:52 PM ET
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It's no longer a secret to the average American that the CEOs of major U.S. corporations regularly pull in millions of dollars on an annual basis. Average annual pay for these company leaders sits at over $17 million — and that’s nothing compared to the billions that upper-echelon leaders like Jeff Bezos, Mark Zuckerberg and Elon Musk earn.

For decades now, CEOs have been raking in salaries that the average employee could only dream of. But as millions of Americans struggle with the far-reaching effects of the COVID-19 pandemic, many are beginning to question whether the ever-widening economic gap between CEOs and average American workers has gotten out of hand. Just how much is too much when it comes to excessive CEO compensation?

Why Does This Great Divide Exist?

First, it's important to look at why some top corporations feel justified in awarding their CEOs salaries that are worth millions, or even billions, of dollars. Part of the answer lies in understanding exactly what a CEO's job consists of.

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A chief executive officer is, simply put, the highest-ranking employee at the head of any given corporation or company. Their duties consist of everything from making major corporate decisions and managing the company's overall operations to acting as a liaison between the company and its board of directors.

In all fairness, a CEO role does involve juggling a number of tasks and decisions that could potentially make or break the future of their company. From making tactical choices that guide the company toward its vision to executing financial, consumer and talent-management decisions, these leaders have a lot on their plates that often justifies their higher pay — at least when it’s reasonable. Their compensation usually consists of a base salary, bonuses and long-term incentives such as shares of their company's stock. The better the company does under the CEO’s leadership, the more their stock options will grow to be worth. In the case of some top-ranking CEOs, stock options alone have proven to be an incredibly valuable form of positive reinforcement.

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As in the economy at large, competition has become another major factor in determining a CEO's potential worth. As major corporations offer higher rewards for their CEOs, others of similar ranks — and CEOs from company to company — have found themselves forced to keep up.

Just How Much More Are CEOs Making?

As the metaphorical captain of a corporation's ship, it makes sense that a CEO would earn more than project managers or even other executives at the same company. The real question is whether the amounts many CEOs are earning are actually reasonable and if their work justifies such high pay. When Jeff Bezos earns twice as much in one second as a person earning the federal minimum wage earns in a month, it’s difficult to understand what Bezos could actually be doing that’s worth such a sum.

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A 2019 report by the Economic Policy Institute (EPI) revealed that CEO compensation has inflated at a rate of 940% since 1978, while the pay rate of the average worker has grown just under 12%. Although CEOs have been making more than the average worker for decades, over time they've come to make an unbelievably larger amount more. Back in 1965, the CEO-to-average worker pay ratio sat at 20 to 1. This gap continued to widen until it reached 58 to 1 by 1989. By 2019, the ratio had exploded to 278 to 1 when factoring in the value of the average CEO's stock options when they were realized.

To put things into perspective, top CEOs are making five times more than the top 0.1% of the nation's other highest earners. And if you’re thinking the pandemic may have helped level the playing field, then think again. By July of 2020 — about four months into the pandemic — over 50 million Americans had filed for unemployment as the COVID-19 pandemic continued to cripple the economy. Imagine the surprise of many furloughed workers when the news came out that some of America's top billionaire CEOs had not only escaped the fallout but had collectively grown $434 billion richer between mid-March and May of 2020.

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The Pandemic Crisis Further Tips the Scales

While many Americans have been clinging to unemployment benefits to survive, a report by Americans for Tax Fairness reveals that not everyone is quite so panicky. The report found that, during the first two months of the pandemic’s lockdown, Amazon's Jeff Bezos raked in $34.6 billion, while Facebook's Mark Zuckerberg earned an additional $25 billion.

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How is such a phenomenon possible? While many factors come into play, there are a few that stand out for their roles in these increases. First of all, It's no accident that the CEOs of tech companies like Amazon and Facebook are seeing some of the largest gains during the pandemic. While many smaller, brick-and-mortar businesses have been forced to close their doors, online giants have been able to enjoy the economic benefits of an entire nation being forced to shelter in place and turn to ecommerce to get shopping done. With the internet becoming an overnight lifeline, web-based companies have enjoyed a huge influx in business.

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It’s also essential to keep in mind that a large percentage of a top CEO's net worth is tied into their stock options. While it's highly unlikely that Mark Zuckerburg was delivered an extra $25 billion worth of $100 bills on a pallet back in May, his massive wealth increase was likely tied to the worth of the stocks and other performance-related financial products he already owned.

Assessing the Future Implications and Ethics of Excessive CEO Compensation

While we can only speculate about the effect that bloated CEO wealth will have on the future, the growing economic gap is an important concern for many out-of-work Americans — and for other employees whose wages are so low that they’re barely scraping by even while working full time. While some corporations argue that reining in CEO salaries wouldn't necessarily guarantee more pay for employees or stockholders, many are beginning to feel that it's an experiment worth undertaking. And considering that Jeff Bezos is on track to become the world’s first trillionaire by 2026, it’s impossible to ignore the ethical implications of someone earning this much money while many individuals are working full time but still living below the poverty line.

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CEO pay is controversial, and for good reason. While CEOs receive bonuses and other compensation for the performance of the companies they lead, it’s the hundreds of thousands of other workers underneath them — the employees who carry out the day-to-day tasks that actually determine the company’s performance — who are doing the real work that creates value for the company. As one person, there’s only so much a CEO can do, and a CEO "has little impact on the work performed," according to The Balance Careers. Essentially, a CEO guides the company’s strategies but doesn’t do all the work that drives those strategies — and they could afford to get paid a bit less in order for their employees to benefit from a bit more financial security.

But how exactly do we go about shrinking this growing gap? The Economic Policy Institute points to a number of solutions, including more progressive income and estate taxes. While the very rich would still retain vast portions of their wealth, at least they'd be curbed by being compelled to put more money back into society. "We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so," the EPI urges, and it’ll require actual policies being put into place on a wide scale.

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As the poor get poorer and the rich get richer — and as the U.S. economy appears as though it’ll stay firmly on this trajectory even in the face of the pandemic — economic inequality is an issue that the nation needs to deal with sooner rather than later. The current conditions are unsustainable when millions of Americans deserve to live more secure lives, and it’s essential for policymakers to start taking a hard look at exactly how we can plan to ensure economic fairness moving forward.