Historical Data Over The Growing Controversy Over Executive Pay

Executive pay has become a contentious issue, largely due to the increasing disparity between the salaries of CEOs and average workers. Proponents of high CEO compensation argue that their leadership skills generate significant returns for investors, thus justifying their substantial paychecks. However, critics highlight that stock market returns have not kept pace with the rapid growth of CEO pay in recent decades.

There are numerous instances where companies have awarded substantial pay packages to CEOs who later presided over significant declines in their company’s stock price. This raises questions about the correlation between high CEO compensation and company performance. A closer examination reveals the extent of CEO pay growth, the performance of the highest-paid U.S. CEOs, and cases where highly paid CEOs have underperformed.

CEO Compensation: A Historical Perspective

The Economic Policy Institute (EPI) publishes an annual report on U.S. CEO compensation, focusing on the CEOs of the 350 largest publicly owned U.S. firms by revenue. The EPI’s findings show that the average annual realized CEO compensation in 2022 was $25.2 million, a decrease of 14.8% from 2021, primarily due to the reduced value of exercised stock options. This figure, however, represents a significant increase from the $1.9 million average in 1978.

The CEO-to-worker pay ratio has also seen a dramatic rise. In 1978, CEOs earned roughly 31 times the pay of their average employees, with a ratio of 30.9. By 2022, this ratio had escalated to 342.8, indicating a substantial widening of the pay gap.

Discrepancy in Pay Growth

The discrepancy between CEO pay growth and worker pay growth is stark. From 1978 to 2022, CEO pay increased by an inflation-adjusted average of 1,209.2%. In contrast, inflation-adjusted worker pay grew by only 15.3% during the same period. This disparity underscores the growing inequality in compensation within organizations.

Investor Returns vs. Employee Compensation

While workers have struggled to keep up with the rising cost of living, the report indicates that investors under these highly-paid CEOs have performed relatively well. Between 1978 and 2022, the S&P 500 generated an inflation-adjusted return of 931.8%. Although the stock market returns have not matched the exponential growth of CEO compensation, investors have still fared better compared to the employees of these companies.

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