It’s not your imagination—CEO compensation has significantly outpaced average worker salaries over the years.
The pay for chief executives at major companies in the United States increased by an astonishing 1,085% from 1978 to 2023, while the typical worker’s earnings rose by only 24%, as reported by the Economic Policy Institute, a nonpartisan think tank.
CEOs earned approximately $1.87 million annually in 1978, which ballooned to $22.21 million by last year. In contrast, private-sector workers saw a much more modest change: their annual earnings grew from $57,000 to just $71,000 over the same nearly 50-year period. These figures have been carefully adjusted for inflation, making the comparison even more striking.
In 2023, chief executives earned 290 times the salary of an average worker, a significant increase compared to 1965, when their compensation was only 21 times that of a typical employee.
“CEOs are getting paid more because of their leverage over corporate boards, not because of their skills or contributions they make to their firms,” the EPI report stated. “Exorbitant CEO pay has contributed to rising inequality in recent decades as it has likely pulled up the pay of other top earners—concentrating earnings at the top and leaving fewer gains for ordinary workers.”
Stock-Based Pay
The dramatic surge in chief executive compensation over the past few decades can be traced back to a seemingly innocuous tax policy change in the 1990s. This shift, intended to curb excessive executive salaries, inadvertently opened the floodgates to even more lucrative pay packages, fundamentally altering the structure of corporate compensation.
In response to growing concerns about exorbitant executive salaries, U.S. lawmakers implemented a cap on the tax deductibility of these payments. However, this well-intentioned measure had an unexpected consequence. Rather than reining in CEO pay, it prompted companies to explore alternative forms of compensation.
Corporations began to rely heavily on stock options and other equity-based rewards, which were not subject to the same tax restrictions. This pivot toward stock-based compensation not only circumvented the salary cap but also aligned executive pay more closely with company performance—at least in theory. The unintended result was a meteoric rise in the earnings of CEOs, as stock market gains amplified the value of these new compensation packages, far outpacing the growth of average worker wages.
While it’s true that a CEO’s primary goal is often to increase shareholder value, the relationship between stock performance and executive pay is far more complex and often disconnected from individual merit or company-specific achievements.
The compensation of chief executives is not necessarily tied to improved individual productivity or company performance. Instead, it’s largely influenced by broader market trends. When the stock market as a whole experiences an upswing, CEO pay tends to surge across the board, regardless of the specific performance of their individual companies. This phenomenon suggests that many chief executives are benefiting from general market momentum rather than their own strategic decisions or leadership skills.
As a result, CEOs may reap substantial rewards even when their companies’ performance is merely average or even below par compared to their industry peers. This disconnect raises questions about the fairness and effectiveness of current executive compensation models, particularly in light of the growing wage gap between CEOs and average workers.
The research suggests that the escalating executive compensation is not a result of increased value in their skills or contributions to company productivity. Rather, it appears to be a consequence of CEOs leveraging their influential positions to determine their own pay scales.
“CEO compensation does not appear to reflect the greater productivity of executives, but their ability to extract concessions from corporate boards—thanks to dysfunctional systems of corporate governance in the United States,” the report stated.
EPI challenges the notion that CEOs of major corporations possess such exceptional abilities that they deserve to be compensated far beyond other top earners. It argues that it’s improbable for the skills of these executives to be so extraordinarily superior and detached from those of other high-achieving professionals that it justifies their earnings surpassing the vast majority within the top 0.1% income bracket.
How To Pullback CEO Pay
CEO compensation is currently moving away from stock options toward stock awards, potentially aligning executive pay more closely with long-term company performance. However, this change alone may not be sufficient to address the growing disparity between CEO and worker pay, prompting calls for more comprehensive policy reforms to curb excessive executive compensation.
In recent years, there has been a marked transition in the composition of CEO pay packages. While stock-related components continue to dominate total compensation, the nature of these equity-based rewards has evolved. In 2006, stock options made up over 70% of stock-related pay in realized CEO compensation. By 2023, this figure had dramatically decreased to just 22%, with vested stock awards accounting for the remaining 78%, EPI data revealed.
This shift toward stock awards is seen as a positive step, as it potentially encourages CEOs to focus on longer-term company performance rather than short-term stock price manipulation.
Despite these changes, many argue that more comprehensive measures are needed to address the widening gap between executive and worker pay. Without additional safeguards, the U.S. risks becoming a “winner-take-all” society where wealth is increasingly concentrated at the top.
Proposed policy interventions include reinstating higher income tax rates for top earners, using tax policy to discourage excessive CEO pay, strengthening the binding nature of shareholder votes on executive compensation and employing antitrust measures to limit the market power of large corporations.