What's Behind the Huge (and Growing) CEO-Worker Pay Gap?

And could it possibly be justified?

800 ron johnson1.jpg

Ron Johnson, the disgraced outgoing CEO of JC Penney, made an astonishing 1,795-times the average wage and benefits of his department store workers, according to a new survey from Bloomberg. That makes JC Penney the single most unequal company in the U.S., by CEO-worker pay ratio.

Other companies in the "top" ten included Starbucks, Simon Property Group, CBS, and Abercrombie & Fitch.

Here are the five companies with the highest CEO/worker pay ratio compared with the S&P average and the 1965 average among the 350 largest companies.

Screen Shot 2013-04-30 at 2.22.22 PM.png

The historical comparison is important because the gap has straight-up exploded in the last 50 years. It's been a wild roller-coaster for CEO pay since the tech bust and the housing bust framed the last decade. But the overall story is that the CEO ratio has increased by a factor of ten in the last half century.


Why are executives making so much more than their workers? Here are two explanations.

First, it's important to see how the ratio is being stretched on both ends. At the bottom, you have the slowing growth in market wages for middle- and lower-class work (like JC Penney salesperson or Starbucks barista). At the top, you have the acceleration of stock returns for public companies the 1990s and 2000s, which has fattened up executive compensation.

Second, a famous 2005 paper "The Growth of Executive Pay" suggests other reasons to explain why boards of directors are paying CEOs so much. ("Pay has grown much beyond the increase that could be explained by changes in firm size, performance, and industry classification," they write.) Their most compelling idea is that bull markets don't merely encourage more equity-based compensation; they also make shareholders less likely to kick and shout when executives pull down one-year pay packages many hundreds of times more than their average workers. In other words, bull markets make CEOs fabulously wealthy, and they make shareholders indifferent to their fabulous wealth.

Which brings us back to Ron Johnson. Despite his record-high compensation, he failed, and JC Penney has shed more than 20,000 jobs in the last year. Johnson tried to rescue a slowly-sinking company, but instead, he accelerated its drowning. He didn't deserve 2,000 workers' salaries each year. But the board of directors didn't know that before they tapped him, and they will almost certainly reward their next CEO with an astonishing sum of money, too, especially if he succeeds in turning around the company's sliding stock.

The uncomfortable truth about successful CEOs of enormous companies is that their impact is truly enormous. They touch many people's lives, and fewer (but richer) people's portfolios. Any idea that saves JC Penney -- along with its tens of thousands of jobs and billions of dollars in wealth -- would actually have a financial impact worth much more than 1,795 average workers' salaries. If only that idea existed.