How to Reduce the CEO-Worker Pay Gap? Impose Consequences

Some 87% of Americans, polling tells us, consider today’s growing gap between U.S. CEO and worker pay a serious cause for national concern.

That gap has become a cause for global concern as well. CEO-worker pay gaps in the United States, as data in a new Altrata report make clear, are essentially cementing in place our world’s current “colossal” maldistribution of income and wealth.

In the decade ahead, the Altrata report forecasts, more than a quarter of the world’s wealthy worth at least $5 million will be passing on “almost $31 trillion” to their nearest and dearest. Some 64% of that $31 trillion will be coming from the world’s richest of the rich, those “ultra wealthy” deep pockets individually worth over $30 million.

We need more than disclosure, posit advocates for fairer corporate compensation. We need consequences.

Corporate executives, Altrata calculates, will make up over 71% of those global “ultra wealthy.” Another 21% of these ultras will be entrepreneurs who either founded or co-founded their own business empires. And nearly half of all these corporate execs and entrepreneurs, add Altrata’s researchers, will be deep-pocketed souls who call the United States home, “a testament” to America’s continuing status as the nation with by far the “world’s largest” population of ultra wealthy.

In other words, the world will see over the next 10 years “the transfer of a staggering level of wealth,” and American top corporate execs will be sitting right in the center of that transfer. The billions these execs have amassed since the early 1980s—the years when CEO pay started soaring—will be vastly expanding the ranks of those who hold massive amounts of inherited wealth.

None of this, of course, should come as much of a surprise. CEO pay levels in the United States have now been making headlines for well over four decades. And this year those executive pay stats are showing what The New York Times has dubbed a “new wrinkle.”

Over the past half-dozen years, under the authority of the 2010 Dodd-Frank Act, the federal Securities and Exchange Commission has been requiring publicly traded corporations to annually disclose the ratio of their CEO pay to their median employee pay. The value of the stock rewards in that CEO pay has up until now reflected the share value of those stock rewards when the CEOs received them.

Share values can, of course, increase substantially over time. The original SEC pay-ratio regulations didn’t require corporations to figure those increased stock values into their CEO-worker pay ratios. The new SEC rules do require companies to “disclose how much CEO stock holdings increase when the market rises.”

The difference between the original and “new wrinkle” approaches can be substantial.

Under the original approach, America’s 10 most highly paid CEOs last year collected between 510 and 3,769 times what their company’s most typical employee earned, with the year’s top-paid chief exec collecting $199 million.

Under the SEC’s “new wrinkle” accounting approach, all the 10 highest-paid U.S. chief execs in 2023 saw their compensation run over $199 million, with 4 of the top 10, analysts at Equilar calculate, making over $600 million and two more making over $300 million.

By either calculation, of course, contemporary U.S. CEOs are making fantastically more than their CEO counterparts back in the middle of the 20th century. In the 1960s, the Economic Policy Institute has pointed out, chief execs at major U.S. corporations seldom pocketed much more than 20 times the pay that went to their workers. Since then, the CEO-worker pay gap has quadrupled—and then quadrupled again.

The “new wrinkle” approach the SEC has added into the annual pay disclosure mix aims to give the American public a more accurate sense of just how outrageously wide the CEO-worker pay gap now stretches. The new numbers, disclosure advocates seem to believe, will do a better job of shaming corporate boards into more compensation common sense.

The original SEC approach to disclosure certainly didn’t do much shaming. Corporations that have disclosed their CEO-worker pay ratios under that original approach have not seen “any significant change in the level of CEO pay,” notes the University of Colorado business school’s Bryce Schonberger, a co-author of a recent chief executive pay study.

But the “new wrinkle” approach, unfortunately, doesn’t seem at all likely to produce much “significant change” either. We need more than disclosure, posit advocates for fairer corporate compensation. We need consequences. What might those consequences be? Some of the nation’s top CEO pay experts explored that question earlier this week at the U.S. Senate Budget Committee’s first-ever hearing on executive pay overreach.

Among the witnesses: Sarah Anderson, the Institute For Policy Studies Global Economy Program director. One national poll last month, Anderson told the Senate panel, asked likely voters about a promising possible consequence that lawmakers could pursue: a tax hike on corporations that pay their CEOs at 50 times or more than what they pay their most typical employees.

Some 80% of those polled, noted Anderson, supported that idea, “including large majorities in every political group.”

Taxes on corporations with outrageously wide CEO-worker pay differentials, Anderson added, give corporations with huge internal pay disparities two basic choices: either narrow their pay gaps or face a bigger IRS bill at tax time.

“A company where half of employees earn less than $60,000, for instance, would have to limit CEO compensation to no more than $3 million or raise worker pay to avoid higher taxes,” Anderson explained in her testimony. “In 2022, average S&P 500 CEO pay hit $16.7 million.”

Could moves like taxing corporations that pay their top execs far more than their workers gain any traction in Congress? Maybe. Some lawmakers already back that notion. Count the chair of the Senate Budget Committee, Rhode Island’s Sheldon Whitehouse, as one of those lawmakers.

“Our tax code is corrupted and rotten, turned upside down for special interests,” the senator charged at his panel’s June 12 hearing.

What can we do about that corruption? Whitehouse advanced a number of fixes. Among them: Raise taxes on “companies that pay their CEOs more than 50 times what they pay their average worker.”