CEO Performance Pay Is One of Capitalism’s Great Myths

The ratio of CEO pay to worker pay is almost 300 to 1. Are we really supposed to believe CEOs work 300 times harder or create 300 times more value than us?

Two entertainment industry CEOs talk in front of a projection showing the logos of their new acquisitions. (Frederick M. Brown / AFP via Getty Images)

As an abstract value at least, equality is generally seen as a good thing in most liberal democratic societies. Outside certain fringes of the Right, in fact, it’s exceptionally rare to see people defend inequality as an end itself. This is why most arguments for the unequal distribution of wealth or power rhetorically adopt an egalitarian guise or try to make the case that inequality actually benefits the least well-off. Advocates of so-called trickle-down economics, for example, might in practice support economic policies that have greatly exacerbated the gap between rich and poor, but they nonetheless like to insist that there’s some wider populist benefit to those policies (the wealth, after all, is ultimately supposed to “trickle down”).

Other defenses of inequality argue from grounds of efficiency or deservingness — and, when it comes to executive compensation, the two rationales often appear in tandem. A CEO making hundreds (or even thousands) of times more than an average worker at the same company might sound unfair — or so the argument generally goes — but the gap is simply a reflection of the greater value they have created. If that’s the case, it might actually follow that a 500:1 ratio of CEO to worker pay is justifiable: the CEO has earned their salary, and it reflects a reward commensurate with good performance (not to mention an incentive for that performance to continue).

This argument has always been a myth, but that has not stopped the average ratio of CEO to worker pay from widening tremendously. In 1965, America’s average CEO to worker pay ratio was 21:1. According to a 2022 analysis conducted by the AFL-CIO, it is now 272:1, with the average wages of CEOs and workers at $16.7 million and $61,900 respectively. It’s already pretty hard to make a moral case for inequality on this scale — but, as it turns out, the efficiency and desert arguments for it don’t hold water either.

A new analysis jointly conducted by the Institute for Policy Studies (IPS) and the Congressional Progressive Caucus Center (CPCC) suggests that colossal increases in CEO pay are unrelated to improved performance and reflect little more than “a rigged system that extracts wealth from ordinary workers and channels profits to the top of the corporate ladder.” This is immediately evident when you look at the methods used to inflate compensation for the highest-paid executives.

Once illegal and considered a form of market manipulation, stock buybacks allow a company to artificially inflate its own value. In 2021 and 2022, the analysis notes, companies on the S&P 500 spent a record amount on the practice and, since the lion’s share of CEO pay (on average just over 80 percent) now comes in the form of stock options, the upshot is that executives get a massive boost as well.

As William Lazonick put it in the Harvard Business Review nearly a decade ago: “Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons . . . but none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices.” Far from being efficient, moreover, the IPC/CPCC analysis points out that the billions now spent every year on stock buybacks represent money that might otherwise be directed to more productive or constructive ends like research or simply higher wages at a company.

Needless to say, there is no particularly good or defensible reason for an executive to make hundreds or thousands of times more than a worker. There are, however, plenty of relatively straightforward ways that the problem of outlandish CEO compensation could be addressed through tax policy. As the analysis notes, the Tax Excessive CEO Pay Act backed by Bernie Sanders and Elizabeth Warren in the Senate and Barbara Lee and Rashida Tlaib in the House would link the federal corporate tax rate paid by companies to the size of the gap between median CEO and worker pay. Other options include levying an excise tax on firms with a disparity of more than 50:1 and closing tax loopholes that enable executives to park money in special tax-deferred accounts.

Regardless, public-opinion polling shows overwhelming support from Americans across the political spectrum for reining in obscene executive pay. And, with 87 percent reportedly viewing the widening gap between CEO and worker pay as a problem, it doesn’t seem like very many actually buy the idea that an executive making hundreds of times more than a worker is in anyone’s interest except the CEO’s.