The Myth of CEO Pay and “Greed”

At Mises Daily this week, Matt Palumbo pokes some holes in the narrative about how CEOs are paid too much at the alleged expense of the workers:

For many, the rise in CEO pay relative to the average worker’s pay is a perfect illustration of the rise in inequality that Occupy brought to the nation’s conscience. And, we are told it should worry us if this disparity comes at the expense of the worker, as the CEO takes more and more for himself, leaving scraps for everyone else.

Luckily, this is not what happened. Something changed: the average size of a company on the S&P500. The companies comprising the S&P are ever changing, with larger companies replacing smaller ones. It would thus make sense that as the average market capitalization of companies comprising the S&P increases, the average CEO pay of those firms will increase. According to economists Xavier Gabaix and Augustin Landier in a study published by the National Bureau of Economic Research, “the six-fold increase in CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large U.S. companies during that period.”

There are obvious exceptions to the rule, such as bailed-out firms paying their CEOs exorbitant salaries, or the seemingly oft-reported media stories on CEOs paying themselves handsomely as they run their firms into the ground, but they’re just that: exceptions.

Contrary to whatever narrative is implied by the “CEO pay is out of control” charge, this increase in pay has not been at the expense of the typical worker. Worker compensation (salary + benefits) as a percent of corporate income has been relatively stable since the 1940s.

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