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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.

42 Comments

  • Chris McAdam, September 4, 2015 @ 12:57 pm Reply

    I think you might be overstating the share of CEO payroll. Walmart is one of the biggest targets in this discussion.

    If you took the entire senior management of Walmart’s pay, as listed here :
    http://www1.salary.com/Wal-Mart-Stores-Inc-Executive-Salaries.html
    You’d get about 75 million dollars.
    If you redistribute it ONLY to Walmart employees making below the median wage for the company (1.05 million) that works out to about $71, which is less than 3.5c an hour. And again, that’s only the lowest paid half of the employees.

    It is very much worth noting that the vast majority of that compensation ISN’T cash….. about 54 million is in stock (so all the employees get a fraction of a share?) There’s only about 18.5 mill in cash, which drops it to a fraction of a penny an hour….

  • Thomas Weber, September 4, 2015 @ 3:57 pm Reply

    Excellent post. Reminds me of a response I wrote to an article on CEO salaries.

    I think this issue gets a lot of press / stirs up a lot of emotion because it feels so unfair. Either people wrongly suspect that reducing CEO salaries will increase their pay, or they just don’t want anyone to be winning at their expense (see research on the British game show Golden Balls).

  • Daniel Hawkins, September 5, 2015 @ 1:12 am Reply

    You’re right, as a "well" this doesn’t do much good. But what about as an incentive structure?

    If CEO pay were capped at some multiple of the lowest pay, or of the median pay, CEOs would be incentivized to increase pay for everyone, not just themselves. This effect would be far more successful in keeping the income gap from spiraling out of control than redistribution of a single person’s income.

    • Chris McAdam, September 9, 2015 @ 12:57 pm Reply

      CEO’s often get equity…. and equity is rewarded, eventually, by dividends. If salaries get capped, profits will likely be distributed to investors, not employees…. and there’s a good argument for doing that. Return on investment is the only reason people invest to begin with. Those employees have no jobs at all if there’s no company to employ them.

  • John Henning, September 9, 2015 @ 6:45 am Reply

    Fiddling with CEO pay scale may not matter ✓agreed
    •CEO pay redistributed to employees isn’t enough to make a significant difference
    •Corporation would apportion CEO salary into profits not give to employees
    •Total of all American CEO’s pay and trade off of well being of other Americans

    Right people on the bus and getting the wrong people off
    •CEO pay margin attracts talent to business ✓yes
    •10X more stress and exposure
    •Intense attention to Board of Directors and shareholders

    Occupy Wall Street
    •Address social and economic inequalities ✓right
    •We are 99% slogan and 1% wealthiest

    Warren Buffett’s editorial "Stop Coddling the Super Rich"
    •Working class fighting for this country
    • 17% of Buffett’s income taxed, but middle class taxed a higher % w/ income/payroll tax

    Alternatives to CEO golden parachute
    •Keep CEO pay within boundaries of corporate worker pay scale
    •Corporate campaign enabling trust and integrity with employees
    •Incentivize employees with equity in the company and greater control of decision making
    •Creating a team of CEO’s who split up the pie

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