“Top CEOs in America now earn, on average, over 300 times average pay. In 1965 it was 20 times. And folks wonder why there are populist uprisings of Left and Right.” So says Andrew Neil, the doyen of British journalism, and he has a point.
Living standards are higher than they have ever been, yet we carp and complain about the capitalist system that has pushed them up. Why? Are we resentful by nature? Or, to put the question more neutrally, might we have an innate tendency to measure our wealth in relative rather than absolute terms?
Perhaps. For most of the past million years, the way to win mates was to jostle for position within your tribe. We are descended from those who did it best, and we carry their status-conscious genes.
That, though, cannot be the whole explanation. After all, we don’t object in principle to wealth differentials. Not even the best-paid CEOs earn as much as Cristiano Ronaldo or Floyd Mayweather, yet sports stars generally get adulation rather than envy.
Is it, then, that we think CEOs are ripping us off? That doesn’t quite work either. For one thing, we are not being ripped off. We are richer, cleverer, healthier, cleaner, and even taller than any previous generation. In any case, unless we own their companies, we are not paying the CEOs a penny. The real claims on your wallet, as an American taxpayer, come from unfunded pension liabilities in the public sector, but no one is ever going to rage at retired firefighters.
No, the obvious explanation for anti-CEO sentiment is that, unlike sportsmen or firefighters, their function is not immediately obvious to the layman. We know that they make decisions and sit in meetings and so forth. But we wonder how that can possibly be 300 times more valuable than the labor of their cleaners, drivers, or receptionists.
Before I attempt the unpopular task of defending boardroom pay, it’s worth noting that the 300 figure is absurdly exaggerated. It is produced annually by the AFL-CIO and, as the brilliant Mark Perry keeps explaining, it relies on statistical chicanery. For example, it compares CEOs to all workers rather than just full-time workers — let alone full-time workers in their prime earning years. A like-with-like comparison would reduce the ratio to 177:1 (if we take mean CEO pay) or 104:1 (if we take the more meaningful median figure). Still, it’s a large differential. Are they worth it?
One way to answer that question is to look at the impact that a CEO has on share value. By that measure, CEOs have indeed become vastly more important over the past half-century. When Burberry’s chief executive, Angela Ahrendts, announced her departure, it wiped $700 million off Burberry’s value. Conversely, when the unfortunate Steve Ballmer resigned from Microsoft, the firm’s value jumped by $25 billion.
CEOs’ pay packages, vast as they are compared to yours and mine, are tiny when set next to figures like these. When a company is dealing with colossal sums, the difference between a moderately competent CEO and brilliant one is worth billions. The same is not true of drivers, cleaners, receptionists — or newspaper columnists. That, in a nutshell, is what dictates salaries.
Why has CEO remuneration leaped since the 1960s? Because companies are larger and handle more cash. A small increase in the usefulness of the CEO translates into big increase in profits. At the same time, the global economy has become more integrated, meaning that there is wider international competition for the top jobs.
You might feel that sitting in a boardroom is not intrinsically as valuable as, say, being a doctor. Fine. We can all have our opinions about what constitutes value. I’d love to live in a world where newspaper columnists are more valued than soccer stars. But, since we all have different views about what others deserve, there needs to be some way to aggregate our preferences.
That is what the market does, setting our income, by and large, according to what others are prepared to pay for our services. It’s true for doctors and soccer players, and it’s true for CEOs.
If you resent executive pay levels, here is a thought to console you. Almost no one grows up dreaming of sitting in a boardroom. It’s a fair bet that, when they were kids, most CEOs saw themselves as doctors or firefighters or soccer stars rather than as company directors. Their salaries reflect the fact that their jobs require competent and qualified people to do unglamorous things for long hours. They had to be, as it were, bought out from their original ambitions. And if they turn out not to be worth it? Well, they still cost you nothing.
