June 24, 2015

Higher CEO salaries are not driven by performance, says think tank

CEOs at the top US firms are earning three times more than they did 20 years ago—but with no corresponding increase in productivity, according to a report by the Economic Policy Institute (EPI).

The report finds that, in 2014, average compensation for chief executive officers among the 350 largest US firms was $16.3 million. This represents a rise of around 4% since the previous year, and over 50% since the start of the economic recovery in 2009.

Since 1978, CEO compensation has increased by almost 1,000%, while the average worker salary has grown by just under 11%. On average, chief executives now earn 300 times as much as their employees.

However, according to the EPI, the higher salaries do not reflect better performance of executives, but rather their power to lobby for higher compensation. If CEOs were paid less or taxed more, they argue, it would have no adverse effect on output or employment.

The report also finds that higher CEO salaries have had a spillover effect in raising the pay of other executives and managers, and are a major contributory factor to inequality in the US.

The rise in CEO compensation is the subject of an IZA World of Labor article by Michael Bognanno. He writes that managerial power has exerted an influence on CEO pay, and that “measures that enhance the transparency of compensation packages, strengthen the shareholder voice on pay issues, and limit the CEO’s freedom to exercise stock options might help move CEO pay toward just levels.”

Read more on this story at the Wall Street Journal and read the Economic Policy Institute’s report here.

Related articles:
Efficient markets, managerial power, and CEO compensation by Michael Bognanno

Market compensation and executive pay by Priscila Ferreira