The compensation of American executives—CEOs and their “C-suite” colleagues—has long been a matter of controversy, especially recently, as the wages of average workers have stagnated and economic inequality has moved to the center of the national debate. Just about every spring, the season of corporate proxy votes, we see the rankings of the highest-paid CEOs, topped by men like David Cote of Honeywell, who in 2013 took home $16 million in salary and bonus, and another $9 million in stock options.
Rarely, however, does the press coverage go beyond the moral symbolism of a new Gilded Age. Coverage of CEO pay usually fails to show that the scale of CEO pay packages—and the way CEOs are paid—comes at a cost. At the most basic level, the company is choosing to pay executives instead of doing other things—distributing revenues to shareholders, raising wages for workers, or reinvesting in the business. But the greater cost may be the risky behavior that very high pay encourages CEOs to engage in, especially when pay is tied to short-term corporate performance. CEO pay also plays a major role in the broader trend toward radical inequality—a trend that, evidence has shown, precipitates financial instability in turn.
CEO pay has been controversial in the United States for more than a century—for as long as corporate management has been a profession separate from ownership. In economic booms, CEO pay skyrockets and, after the inevitable bust, it attracts attention—as the million-dollar paychecks of executives such as W.R. Grace of Bethlehem Steel and Charles Mitchell of National City Bank drew notice in the 1930s. But the most recent debate focuses on the staggering, uninterrupted rise in CEO pay over the past three decades, following a long period of moderation in both executive pay and in overall economic inequality. Between 1940 and 1970, average CEO pay remained below $1 million (in 2000 dollars). According to the Economic Policy Institute, from 1978 to 2013, CEO pay at American firms rose a stunning 937 percent, compared with a mere 10.2 percent growth in worker compensation over the same period, all adjusted for inflation. In 2013, the average CEO pay at the top 350 U.S. companies was $15.2 million.