Why Do CEOs Make So Much?

(TFC) – Over the past four decades, the average salary for CEOs has increased 90 times faster than the pay for the average worker. This begs the question: why are CEOs making that much income, especially when the average wage for everyday workers has more or less stagnated since 1972?

It’s not a matter of productivity. According to the Economic Policy Institute, since 1973 through 2016, productivity has increased 73.7%. In contrast, the average wage has increased only by 12.3%. The average worker is working harder, working longer hours and not being compensated accordingly.

Workers are the backbone of any company. Without them, the business simply can not exist.How, then, can companies justify doubling, tripling, even quadrupling CEO compensation on an annual basis when the workers responsible for creating their wealth are struggling to survive?

The simple answer? Because they can.

Growing Wealth Inequality

A large part of the problem is the slow growth in the hourly wage. Between 1979 and 2016, the average hourly wage increased by only .2%. Contrast this with inflation. According to the Bureau of Labor Statistics, prices for everyday household items such as groceries have gone up by 1.6%. This means that while a worker earning $15 per hour now makes an average of $18 per hour, the same groceries that cost them $20 in 1979 now cost $32.

Contrast this with CEO wages. The average CEO in America now makes 354 times what the average worker earns. And the gap continues to widen.

Part of the issue is that the very people who determine what CEOs should earn are, in fact, CEOs. In a corporation, the board members, including the CEOs, decide what their reasonable compensation should be. And, especially in the United States, where CEO pay is basically unregulated, there is nothing keeping CEOs from increasing their pay as much as they like.

Another factor is the gap in educational levels between CEOs and low- to median-income workers. However, this in no way is an accurate reflection of reality. While it is true that less educated workers tend to earn less, even those with a college degree have seen their wages increase by only 5.1% over the past decade.

On average, those with degrees earn approximately $53,000 per year. Compare this to CEO salaries. The CEO of HCA Holdings, a hospital group, pulled in $46.4 million per year. Gameco Investors CEO Mario Gabelli’s salary has grown 11.8% since 1998 to a whopping $69 million per year. And Oracle CEO Larry J. Ellison’s pay has increased 24% since 1998 to $90 million per year, over 600 times what the average worker earns.

Addressing CEO Salaries

Certainly, as hard as someone like Ellison may work, they are not working 1,600 times harder than their employees. Indeed, many members of the working public decry the fact that CEOs earn so many times what their employees make.

According to one global study, the vast majority of people believe that, on average, CEOs should not earn more than 4.6 times more than their workers. Furthermore, many of the people surveyed had no idea that the disparity between CEO and worker earnings was as vast as it was.

Some regulations previously established at least allow for public disclosure of CEO salaries. Under Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, publicly traded corporations are mandated to report the annual compensation of the company’s CEO.

However, this is subject to change. President Trump tasked Treasury Secretary Steven Mnuchin to do a regulatory review of Dodd-Frank. Whether or not the mandate to reveal CEO salaries will stand remains a matter of discretion for the Republican-controlled Congress and White House.

Transparency isn’t the only fix to the issue of high CEO salaries. One other proposed solution is to cap CEO salaries at no higher than a specified ratio over the average worker wage. While currently, the United States has no legislation in place capping CEO salaries, working toward such a measure would go a long way toward addressing wage disparity.

Some companies have already chosen to cap CEO salaries, and one act everyone can take to address income disparity is to patronize or work for these companies. For example, Whole Foods caps its CEO’s salary at no more than a 19:1 ratio. Costco, a company famous for treating its employees fairly, has a 10:1 ratio for CEO to worker compensation.

Not only do these voluntary caps make sense on an ethical level, but they also help to ensure employee satisfaction and decrease turnover. As its far less costly to give current employees a raise by capping CEO salaries, it makes good business sense as well.

In today’s conservative political climate, it is foolhardy to anticipate that the government will act to address the disparity in income between CEOs and workers. However, by researching companies and shopping smart, we as consumers can reward those companies that voluntarily cap their CEO salaries, and hit the others where it hits them most — right in their overflowing wallets.