CEO Salaries and Low Worker Wages: How Do They Relate?

In the years since the 2008 financial crisis and in particular since the rise of Occupy Wall Street in 2011, growing attention has been focused on the CEO-to-worker pay ratio. This statistic represents how much more the average public corporation CEO makes than the average non-supervisory production worker. If this ratio was 10:1, it would mean that these CEOs made on average 10x more than the workers in their companies.

That ratio has been growing in the United States for some time, and its rate of growth accelerated during the recovery from the post-crisis recession. Currently it stands at about 375:1, which is the highest in the industrialized world.

Many people see this as a problem. Some see it as a problem because it seems to them simply unfair that some people should take so much more money than others for putting in similar amounts of effort. Others believe that if the ratio wasn’t so big, regular Americans would be better-off; some of these people support laws that would restrict how much CEOs get paid. Because the latter is more measurable, we’ll explore it.

So the question we’re out to answer is: “does high CEO pay significantly affect the wages of other American workers? Would reducing it significantly improve the well-being of other Americans?”

There are two secondary questions to answer to help us determine this:

  1. Would the money from reduced CEO pay end up in the hands of American workers?

  2. Would the amount of money transferred be significant?

To answer question 1, we’ll look at corporate profits. If corporate profits are fairly low, it means the corporations are short on money and that reducing the amount paid to CEOs would provide the money needed to increase wages for other workers. If profits are high, it means that corporations already have enough money to pay workers more, but due to market forces are simply not doing so. In the latter case, it would be likely that reduced CEO pay would simply turn into greater corporate profits.

As we’ve seen in a previous post on corporate taxes, corporate profits are at an all-time high: $1.7 trillion.

How does this compare to how much CEOs are paid? Let’s do some quick math:

This means that publicly-traded-corporation CEO pay is about 0.7% of corporate profits. If we multiplied this by 10 as a safety factor for private corporations (which have much lower CEO pay but are more plentiful -- and are allowed to keep their salaries private), we still get under 10%.

This suggests that reducing CEO pay wouldn’t increase corporate coffers by a large amount, and would not “free up” cash to increase wages.

But let’s look at question #2 anyway with a hypothetical: what if corporations were required to reduce CEO pay and redistribute that pay to workers. What might happen?

Knowing that CEOs take home about $118 billion total, we could redistribute that number. Because most private corporations have significantly lower CEO salaries, most of them would be unlikely to be hit by a CEO pay cap.

If every dollar of that $118 billion was entirely redistributed over the 157 million Americans in the labor force, each worker would receive an extra $720 per year, or about 36 cents per hour.

What this suggests: while relative CEO pay is higher than it’s ever been, it’s probably not the right “well” to dip into in order to increase worker wages. Corporations have a significant amount of profit to work with, but market forces are keeping those from being distributed to workers.

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Erik Fogg

US political and cultural dialogue is broken, and we intend to change that. We're starting by giving you Something to Consider.