As college students, we sometimes dream about what life after college will be like, and the dreaming most definitely includes dreaming about having a full-time salary rather than the low paying, part-time jobs we currently have. When we start our full-time jobs, at first, we are thrilled to be making more money than previously, but it doesn’t take long to realize the large gap between our position and the CEO of the company. In Ruth Umoh’s article for CNBC, she writes, “According to a report from the Economic Policy Institute, the average CEO pay is 271 times the nearly $58,000 annual average pay of the typical American worker.” This fact might make several of us frustrated or confused at the possible injustice, but let me take a moment to explain just a bit of the history behind this rise in salary. Understanding this will help us to make a difference in businesses where injustices are occurring and maybe someday, to create businesses that are different, where employees can tell that their supervisors genuinely want to help them succeed in life.
While it does make sense for a CEO to have a higher salary when one considers the amount of work it takes to climb the corporate ladder or to start a business, there is still more to the history of the rise in CEO salaries. Back in the 1930s, businesses needed ways to increase their stock value quickly. These businesses discovered that by repurchasing (or “buying back”) their company’s stock, they could increase the stock price because of the new limited supply. Previously, most stock price increases resulted from new products and innovations from companies that generated excitement for investors. Stock buybacks produced a loophole through simple supply and demand principles to artificially increase the stock price. However, these buybacks came to a halt with the Securities and Exchange Commission of 1934, which gave the government the ability to have companies stop the manipulation of stock prices and insider trading.
Without the option to buy back their stock, companies were left with the opportunity to use that money to reinvest in factories, increase wages, or give dividends to investors. The SEC was successful in scaring businesses away from stock manipulation, and for a while, worker wages increased steadily with productivity increase as well. From the 1930s until the 1970s, CEO compensation remained relatively stable (Frydman & Saks).
This situation all changed when President Reagan appointed John Shad as the SEC chair in 1981. In 1982, Shad allowed companies to buy back stock from investors once again. The incentive for businesses to have buybacks increased as CEOs started to earn bonuses under the condition that the company’s stock price went up. Since stock buybacks increase stock prices, CEOs began the practice once again. This caused executive compensation to increase by 5.6 percent in the 1980s and by 18.5 percent in the 1990s (Frydman & Saks).
Unfortunately, when a company uses funds for stock buybacks, less is allocated for reinvestment in factories or wage increases for workers. Over time, this has caused some factories to go out of business from the fund allocation to stock buybacks. This loss of jobs, in turn, impacts local communities and businesses as the average worker no longer has the compensation for living the lifestyle to which they had grown accustomed.
There is no doubt that most CEOs deserve higher compensation that aligns with their greater responsibility but as Christians, it is important for us to combat the injustices that our society is facing through love, grace, and knowledge of the situation before us. I would encourage you to take some time to consider what your part is. By increasing reinvestment in factories or wages to workers, CEOs might have the power to increase the wealth of the whole business. In your future roles, will you allow workers on the floor to join the corporate boards to provide their insight? Or will you start a business where you ask yourself, “How much is enough” for the CEO? What might your role be?
Frydman, C., & Saks, R. E. (n.d.). Historical Trends in Executive Compensation. Retrieved from https://web.stanford.edu/group/scspi/media/_media/pdf/Reference%20Media/Frydman%20and%20Saks_2005_Elites.pdf.
Umoh, R. (2018, January 22). CEOs make $15.6 million on average-here’s how much their pay has increased compared to yours over the year. Retrieved from https://www.cnbc.com/2018/01/22/heres-how-much-ceo-pay-has-increased-compared-to-yours-over-the-years.html
Vox. (October 2019) How American CEOs got so rich. Retrieved from https://www.youtube.com/watch?v=ylLTMYt24lA