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CEO-to-Worker Pay Ratio Has Skyrocketed Since 1980s

Chris Gaetano
Published Date:
Sep 4, 2019

A recent analysis has found that the pay ratio between a firm's CEO and its median worker has drastically increased over the decades, according to MarketWatch. The study, conducted by the Economic Policy Institute, said that, in 2018, the CEO-to-median worker pay ratio was 278 to 1. The ratio in 1989, in contrast, was 58 to 1. Going even further back, the ratio in 1965 was 20 to 1. The report also said that CEO pay has increased by 1,008 percent between 1978 and 2018, compared to the 12 percent growth seen in the same time period by the typical worker. 

A working paper from 2017 posited that a large CEO-to-worker pay ratio has the potential to negatively affect a firm's performance, though not in all cases. The paper says that many conversations around inequality wind up lumping the concept in with inequity, when they should be understood as two separate phenomena. Inequality is an objective fact (this person makes this amount while that person makes that amount) that can draw either positive or negative value judgments but is still a solid statistic. Inequity is subjective and concerns judgments about who deserves what pay (this person makes this much because of X while that person makes that much because of Y).

The author, Ethan Rouen of Harvard Business School, says that while inequality and firm performance do not appear to be linked, inequity and firm performance are. Basically, if the CEO makes much more than the typical worker and the typical worker feels that this difference isn't justified, then the worker will be more likely to shirk or cut corners, or even just quit (turnover is higher at firms with perceptions of inequity). So, if CEOs make much more than average workers because of economic factors—for example, because they genuinely are making the firm more profitable—firm performance is not negatively impacted and might even improve. Conversely, if the CEO's large pay package is seen as a consequence of nepotism or rent-seeking, workers will punish the perceived unfairness through higher turnover and lower productivity. This effect is most pronounced, according to the research, where workers feel both that they are underpaid and the CEO is overpaid. 

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