Busting the CEO Inequality Myth: The CEO’s Millions Have No Impact on Your Life
There’s a growing trope that inequality is somehow inherently bad. I should say, rather, inequality only as it applies to financial measures like income or wealth, as it never seems to be measured by time, effort, experience, etc. We consistently hear from certain crowds with a “fixed pie”, zero-sum game mentality that a CEO making some multiple more than the average worker is an outrageous issue that needs to be fixed. This, in principle, is absurd and not surprisingly, with actual math behind it, does not hold up.
Regardless of whether you think it is good or bad, CEOs are paid market rates.
Articles and politicians alike lament and pick out successful CEOs, comparing their wages to the average workers and feigning outrage about the differential. While it makes a clickable headline, the two jobs are not comparable. Large company CEOs who make seven or eight figures per year are by and large responsible for thousands of workers and are paid based on their collective investment in themselves and their craft- their experience, including usually working extensively for decades to be considered for such a decision, their network and a whole variety of other factors. For what is required, there is a smaller pool of people able and willing to take on such a job. Most importantly, there are benchmarks, meaning that pay is often in line with what others have commanded for a similar position, as well as, demand, meaning organizations willing to pay well for such experience.
The role of a CEO of a large corporation, while easy to dismiss, is not an easy job. It is the CEO’s job to set the tone of the organization to attract talent, to make sure the talent does what they need to do, and to take on risk and responsibility when things don’t go as well as projected. While many workers can leave their jobs behind when they leave for the day, CEOs often find their work following them home. While there are always exceptions to the rules, overall the CEO takes on a stressful, difficult job that most might say they would want, but when push comes to shove, they probably wouldn’t.
While we may say the CEO of companies are generally overpaid, if someone is willing to pay them that salary, by definition, they are not. The value of anything is exactly equal to what someone else will pay for it, whether at a flea market, in a store or in the job market. For CEOs, while we can theoretically debate the merits of such jobs commanding millions, not unlike singers and athletes, in practice, all of these professionals are being paid what the market will bear.
Workers are paid the same way. Companies look for people with varying skill sets. The more skills and characteristics, the smaller the pool of available talent is and the more they get paid. As work is performed voluntarily, every worker has agreed to trade his skills and time for a set amount and if they feel that they are undervalued, are free to leave and trade their time and skills with another employer.
Funny enough, if you ask someone what is the appropriate multiple of average worker pay a CEO should make, they will likely not answer and convey in some manner that they don’t know what’s right, but they do know what’s wrong. But, that’s not true; what is true is that they cannot answer you because there is no right or wrong ratio. Again, pricing is all about the market — supply and demand — at a given point in time.
There is a reason why certain goods and services cost more and it is the same reason why CEOs and workers also are paid differently; in both cases, sometimes with great variance.
As market forces are in place, it is also silly to think that if the CEO was making less money, that it would go to the workers.
Money in a company that goes to the CEO doesn’t come from the pay of other workers. Similarly, if the CEO didn’t get as much money, it wouldn’t go to the workers, either. Workers are paid based generally on contribution, and supply and demand; extra money wouldn’t generally go to raise salaries substantially over market rates. Companies that are public or have investors are run to maximize shareholder value, so that “extra money” goes to capital investments, dividends or some other mechanism that creates such value.
Don’t confuse the above with me saying that workers shouldn’t get paid well or that investing in them doesn’t create value. Investing in and treating workers well is imperative for companies that want to be competitive. I sincerely believe that taking care of workers can create a substantial competitive advantage. But, there’s a market at work that creates a ceiling on value. While we all want to believe we are special and important, in general and to our employer, at some price, there are people with as many or more skills and attributes than any of us to fill a given job.
Everything else aside, even if a CEO’s pay went to the workers, it wouldn’t change their lives in any way.
While all of the above is critical to understanding why CEOs get paid what they do, it is even more important to understand that any given CEO’s pay is not coming out of the workers’ pockets.
Take, for example, the CEO of Mondelez, cited in a recent article. Mondelez is a large, global company, but well more than 100 companies rank larger than it on the Fortune 500. With approximately 83,000 workers and, at the time of this writing, a more than $64 billion market cap (aka equity value), I think most would agree that the CEO has a complex job, and a lot to manage and be responsible for.
So, what about compensation? Let’s say the CEO was paid less and we gave that difference to the workers. Well, for every $1 million taken away from the Mondelez CEO, if you were to redistribute it equally among all workers, each worker would get an extra $1.00 per month, and assuming a conservative average of 40 hours worked per week and four weeks per month, $0.0062 cent extra per hour. I’m not one to gloss over small amounts of money as meaningless, but these numbers are in fact so. One would likely make more finding lost loose change on the ground than taking away millions from a CEO.
So, why the outrage?
As the CEO’s pay obviously is not affecting the pay or the wealth of the worker, why is it such a point of outrage and contention? It is possible that people never bothered to do the math. It is also possible that while we used to value and look up to success and many still do, others were able to find their own profit and power in railing against success (also likely assuming the talking point would supplant the math and reason with the short-attention spanned masses). In a world where identity politics rules the day, this is just another tool in the box to create an “us” versus “them” or “big guy” versus “little guy” narrative to divide people based on the rallying cry instead of the truth.
Basically, jealously and the devolvement of politics into a bloodsport is at the root of the CEO pay concerns and argument.
While critics try to find ways to poke holes in it and tear it down, our capitalistic system has worked to lift millions out of poverty. As growth allows the proverbial economic pie to get bigger and as participants can always find ways to change their skills (even more relevantly so with the rapid technological change we are undergoing), virtually any individual has the opportunity to do and make more. It is why people risk life and limb to try to come to the USA to participate in that system.
And generally, the markets work, too. Jobs that require significant skills, experience, networks, risks, responsibilities and the like will have a smaller pool of available talent and get paid more. That’s not inherently bad, doesn’t take away opportunities from anyone else and shouldn’t be anyone else’s business.