CEOs at America’s biggest public companies make 10 times more than they did in the late ’70s, even after you adjust for inflation. Their earnings have grown nearly twice as fast as the stock market, more than six times quicker than the US economy, and roughly 100 times more rapidly than the wages of America’s workers.
On Wednesday, the Securities and Exchange Commission took aim at this spike in CEO pay. By a slim 3-2 vote, they passed a new rule requiring large public companies to share information about how much their CEO earns, compared to their median worker — the person right in the middle of the company’s pay scale.
The rule itself doesn’t carry any mandates, targets, or penalties. Still, by shining additional light on the growing earnings gap between CEOs and their workers — and revealing which companies spend most lavishly on their CEOs — it could help spark new resistance from investers, consumers, or indeed future lawmakers.
How much do top CEO’s make?
A lot more than they used to. In 1980, CEOs at leading companies made roughly 30 times as much as typical workers in their industry. Today, it’s more like 300.
Put differently, if the minimum wage had grown as fast as CEO compensation since 1980, it would be around $95.
Note though, that these numbers don’t actually compare CEO pay with workers in the same firm, just the same industry.
The new SEC rule will allow for more granular assessments, by requiring major companies to say exactly how many median-worker paychecks it would take to equal one CEO paycheck.
Will the new rule make a difference?
Not in any immediate or direct way. It just doesn’t have any teeth, nothing to require that CEO pay should stay below some pre-determined level, say 100 times as much as the median employee.
Having said that, here’s one reason to think it might matter. Some evidence suggests that CEO pay is highly sensitive to prevailing norms, meaning that one CEO’s pay package depends a lot on what other CEOs are making — as opposed to simply his or her value to the company.
According to this theory, the reason CEO compensation shot up in the 1990s wasn’t just because the economy was good and the stock market frothy. It was also because everyone else was doing it. Once a few CEO’s started agitating for historic pay raises, it set off an arms race.
The SEC rule could help establish a new norm, giving corporate boards and shareholders a consistent benchmark when making decisions about appropriate pay packages.
Will the new rule be expensive for companies?
Not really. There may be a few companies who struggle to gather the requisite information, particularly those with payroll systems spread across different countries. But the SEC estimates that compliance costs will only amount to $73 million per year. Even if you accept the far larger $700 million estimate put together by the business-friendly US Chamber of Commerce, the cost still seems pretty minimal, given that it’s spread across thousands of companies, many with annual revenues reaching well over $1 billion.
Has CEO pay contributed to inequality?
It is certainly part of the story. Not only has CEO compensation grown far faster than workers’ wages, it’s also grown faster than the earnings of the top 0.1 percent.
What’s more, it may be that the runup in CEO pay has spilled over into other executive and managerial compensation packages and created a class of “super managers,” who make up a substantial part of America’s economic elite.
Even if that weren’t true, CEO pay would remain a potent symbol of the shifting dynamics in American society, a tangible sign of the growing wealth of those at the top and the stagnating fortunes of those in the middle.
For its part, the SEC’s new rule can be understood as part of the broader effort to adapt to this new reality, and possibly reform it.
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Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the U.S. He can be reached at firstname.lastname@example.org. Follow him on Twitter @GlobeHorowitz