So here’s something to make you cry in your coffee: If you think CEO salaries seem out of step with the wages of the employees who work for them, you’re right. They’re way out of step. Even worse? They may have nothing to do with individual performance.
According to a recent report published by the Economic Policy Institute (EPI), a nonprofit, nonpartisan think tank based in Washington, D.C., CEO compensation–adjusted for inflation–increased 937% between 1978 and 2013, compared to a paltry 10.2% growth for regular workers.
Historically, CEO compensation has increased since the 1960s but, according to the report, exploded in the 1990s before peaking in 2000, with 200% growth in the five-year period between 1995 and 2000.
“Even though the stock market–as measured by the Dow Jones industrial average and Standard & Poor’s 500 index–fell by roughly half between 1965 and 1978, CEO pay increased by 78.7%,” Mishel and Davis note. During that time, regular employees’ compensation also grew, but only a fourth as fast as CEO compensation.
To put this into perspective: In 1965, top CEOs made 20 times more than average workers in their industries. In 2013, that number skyrocketed to 296 times more. The data excluded Facebook, whose CEO compensation of $2.3 billion in 2012 and $3.3 billion in 2013 would dramatically skew the results.
When the stock market took a hit in the early 2000s, CEO compensation slowed, but by 2007, after the stock market rallied, CEO compensation was back near its 2000 levels. After the most recent recession, average CEO compensation reached $15.2 million.
While some economists point to the market for top talent as a driving force behind high CEO salaries, experts at EPI see it differently. The report attributes the increase in CEO compensation to improving market conditions and increased profitability, and notes pay isn’t necessarily reflective of the CEO’s performance. They reached this conclusion by comparing CEO compensation with incomes of the top 0.1% of earners, and found CEO pay far outpaced compensation to very highly paid workers.
Taking it a step further, the authors suggest that redistributing the excess compensation wouldn’t negatively affect the economy, and would actually help broaden wage growth for other employees. This, the authors say, can be accomplished through taxes or changes in corporate policies, where company shareholders vote on top executives’ compensation.
Hat tip: Economic Policy Institute