The CEOs of major corporations earn seemingly absurd sums. The Wall Street Journal’s list of the top 10 highest-paid CEOs listed annual pay packages of $60 to $164 million, but these figures sometimes grossly underestimate the value of their total compensation. For example, Elon Musk, who is not even on the Wall Street Journal list, is in line to receive compensation (including stock options and an array of financial awards other than salary) of $29 billion. Jeff Bezos receives a seemingly paltry salary of $80,000, but he also earns $8 million per hour from his holdings in Amazon stock.
In the US, compensation packages for CEOs are worth nearly 400 times as much as the compensation package for an average worker. While Ireland’s CEOs do not typically pull down such staggering sums, the top 10 Irish CEOs all receive compensation worth between €2.9 and €18 million a year. Ryanair’s Michael O’Leary is in line to receive a €100 million bonus if he stays with the airline for another three years, and the value of his Ryanair stock holding is said to be more than €1 billion.
The stratospheric pay awarded to CEOs is not limited to a few outliers. The total expected CEO compensation in the top 100 US corporations is over $17 million, and perhaps as high as $25 million; a figure that includes a bewildering mix of salary, stock options, bonuses and deferred payments. It was not always this way. CEO compensation grew by over 1000% between 1978 and 2023 (a typical worker’s compensation grew 24% during the same period). In the 1970s and 1980s, CEOs made 20 to 30 times the pay of an average worker, but they now receive several hundred times as much as their average employee.
Are bosses worth the compensation they receive? Classical economists would say that their pay is determined by the market, and that whatever they receive is what they are worth in an efficient market. However CEO pay is not determined by a fair and efficient market, but by consultants, compensation committees and boards of directors that very often include CEOs from other companies. As long as your competitors overpay their CEOs, you will almost certainly fall in line.
You can argue that CEO pay is simply a function of the growing value of the company, since a large portion of the compensation comes in the form of stock (including outright grants of shares, options to purchase shares at favorable prices, or preferred shares) so it is a reward for success. If this were true, you would expect that the CEOs of failing companies would not get paid much.
But examples abound of CEOs reaping big rewards while their companies go down the drain. The obvious example is Musk, who is set to receive the largest compensation package in history mainly from Tesla, at the same time his political adventures were seemingly driving Tesla into the ground.
Musk is hardly alone. Before filing for bankruptcy, Pennys and Hertz both paid bonuses in the millions to top executives, and Boeing paid their outgoing CEO (who led the company at the time of 737 MAX crashes) a large severance. Even in companies that are doing well, CEO pay routinely grows more quickly than company value.
In the long run, the question of whether CEOs are worth what they receive is a difficult one to answer. If we analyze this using a historical lens, the answer is almost certainly no. The difference between what an average worker makes and what a CEO makes has grown to be almost absurd, and there is little evidence that CEOs who are now making 400 times what their avarage employee receives are that much better than CEOs of the 1970s and 1980s, who managed quite well on 20 to 30 times the average worker’s pay.
If we think about this from the perspective of attracting and retaining top talent, the answer is murkier. You could make the case that if you pay your CEO 30 times what the average employee makes and your competitors pay 10 to 15 times that amount, it might be hard to attract and retain the best CEOs.
The more interesting question is what difference CEO pay really makes. Would your employees be much better off if CEOs went back to the old days and received 20-30 times the average worker’s pay? The answer is probably no. Pay for top executives typically represents about 4% of total company revenue. This figure is relatively small because so much of executive compensation often comes in the form of stock options, deferred compensation or the value of the growth over time in stock prices, making it hard to tie executive compensation directly to the funds an organization has available for other purposes.
The bottom line is that if top executives in large organisations made a lot less money, this would not translate into meaningful increases in the pay of average workers or even in the funds that might be available for more productive purposes, such as improving the physical plant or providing better benefits or services for employees.
In the end, CEO pay is probably more of a moral or psychological question than a practical one. That is, it strikes most observers that the rewards given to CEOs are unfairly large. This is made harder to swallow by the fact that the people making decisions to grant such huge amounts to top executives are often themselves top executives, who arguably benefit from this pay inflation.
The perception that CEO pay is out of control undermines people’s faith in the sorts of institutions that are supposed to look out for everyone’s interests. If you believe that a corporation is unfair in the decisions it makes about rewarding top executives, this might undermine your belief about whether other decisions they make (e.g., the rates they charge, the prices they demand) are fair.
You can certainly argue that corporations are not doing themselves a favor by overpaying their top executives. If nothing else, it provides the sort of bad press that organizations usually work hard to avoid. Coming back to Tesla, it is bad enough in many people’s eyes that Musk continues to have any role in the company, but paying him the largest compensation package in history is like rubbing salt in the wound.
Is any CEO ever worth 400 of his or her employees? You might make a case that this was true for Steve Jobs, whose vision drove some of the most profitable products in Apple’s history. You might say the same for Henry Ford, who both built an industry and pioneered the then-scandalous idea that paying his employees well was good for business. You might even say the same for Michael O’Leary, who has led Ryanair to become one of the world’s largest airlines.
There probably are several other examples, but there are also plenty of examples where CEOs presided over the ruin of their companies while making money hand over fist. The proposition that the average boss is worth 400 of his or her employees in terms of contribution is not easily swallowed, and corporations would probably benefit it they could find a way to rein in out-of-control CEO compensation.
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