It won't surprise you to hear that during the past two years when wages increased for workers, wages for CEOs went up as well. What should make you do a double take is the amount by which these top earners’ salaries increased. While a fast food restaurant employee may have received a raise of $3-4 per hour, the top CEOs saw their average income increase to an astonishing 351-1 ratio over the average worker’s, up from 307-1 in 2019.
That kind of increase means that during a worldwide pandemic in which millions of Americans lost income, CEOs were profiting more than ever. CEO salary increases also surpassed the current inflation spike of 7.1%. Rising 18.2% since 2019, CEO compensation outpaced inflation, while workers’ wages rose 4.7% and thus did not keep ahead of it. In fact, since 1978, CEO compensation has gone up by 970.2%, while the average person’s wages have grown about 18% during the same time period.
As PartnershipEconomics.com has written elsewhere, we aren't here to bash CEOs or anyone for that matter. We're all in this current economic system together. There is a problem, nevertheless, with this kind of compensation discrepancy, and we've all got to find and implement a solution that reduces this level of discrepancy.
In the current spirit of American capitalism though, you may ask if there is anything truly wrong with CEOs earning that kind of salary. After all, wasn’t the U.S. economy built on a free market system that, in theory, has no cap on earning potential? Doesn’t a CEO, who takes the single greatest responsibility for the success of a company, deserve to be rewarded in kind? Didn’t Jesus’ parable about workers receiving equal wages for unequal time teach that we shouldn’t be concerned with what others earn?
There is no doubt that the Bible allows for people to earn varying amounts according to their efforts and abilities, such as seen in the parable of the talents. The other side of the blessing of wealth, however, is the responsibility of the top earner toward those whom he or she employs. There are a number of examples where masters are urged to pay a fair wage to their workers. “The laborer is worthy of his hire” is one of many such commands; in fact, there are over 100 verses that address this principle.
With these points in mind, it is important to understand how exorbitant CEO salaries negatively affect the average worker, the company, and society as a whole.
First, the extreme discrepancy between the highest earner’s salary in a company and that of rank-and-file employees has a documented negative effect on the morale of workers in that company. In fact, studies have shown that the greater the gap, the greater the negative effect on general employee morale.
Second, a highly paid CEO with abundant stock options can be greatly incentivized to encourage unethical behavior, such as false reporting, so that there can be personal short-term gain. Also, if the lure of a high salary is foremost in the mind of a CEO, then the probability of that CEO leaving for a yet higher offer from another company is great. This short-term, revolving-door type of executive does nothing to benefit a company in the long run and can instead damage its long-term stability by changing leadership and vision multiple times.
Finally, society as a whole is negatively affected by overpaid CEOs. The negative impact we all feel from this situation is seen in an executive’s ability to hide compensation from lawful taxation because she or he has the means to do so. High executive salaries also reduce the amount of money left to pay the average employee, and lower overall salaries then equal lower taxes from this group as well. Exorbitant CEO salaries are also a hidden contributor to current inflation as current tax laws, loosely regulated pandemic handouts, and an accommodating corporate governance all contribute to upward distribution.
So how do we correct this harmful trajectory? In the second part of this post, we’ll talk about how rethinking our current model of CEO compensation can be hugely beneficial to both individuals and to our society. Join us there. We must reform this area of the corporate landscape if America is to realize a transformative move to economic equity and a better version of capitalism, otherwise we never stop the upward spiral of disparity.
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