Why Do CEOs Make So Much Money?

The world is bigger. So are the stock options.

In 1965, the typical CEO at one of America's 500 largest companies made 20x more than his typical worker. Today, she makes more than 200x. What happened? There is a practical answer and a philosophical answer.

First, CEOs are paid more because they're paid differently—with stock and stock options. The trend of paying executives with stock, which surged during the late 1980s and 1990s, has murky origins, but clear consequences: It has made the CEOs of America's biggest companies unfathomably rich, as you can see in the graph below. Theoretically, paying executives with stock aligns their compensation with their performance. Practically, it means they stand to make absurd sums of money when stocks rise.

But the deeper question is: How much is a good CEO of an enormous company worth? And that's just the problem. It's an extremely hard question to answer. Today's largest multinational corporations are bigger, more international, more complicated, and more besieged by global competition than they used to be. Maybe executives should be compensated more for a harder and more consequential job. 

But how much more is impossible to say. CBS CEO Les Moonves is notorious for pulling down pay packages worth more than $60 million. But his company had $14.1 billion in revenue last year. Relative to his median worker's pay, Moonves is a king. But if he's the best in the business, making less than half-a-percent of his company's total revenue doesn't seem so crazy. It's easy to say a $60 million take-home is wrong. It's harder say what number is right.

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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