Do CEOs Deserve All the Money They Make?
Stop me if you’ve heard this before, “the CEO deserves the money he makes because he takes on the most risk.” It’s a common refrain by those who choose to spend their time defending the extreme income inequality present in our society. As with many of these myths, a bit of interrogation is all that is necessary to discredit it, as we will now see (for the sake of this piece, CEO could easily be replaced with any executives).
First, we must consider the concept of risk as it relates to executive compensation. What exactly is the nature of the risk that the CEO takes on? The CEO is the public face of the company; if the company does well, they get the credit (regardless of whether they deserve it), and alternately, if the company does poorly, they face the wrath of the shareholders. Ok? But where is the risk? CEOs are usually provided such enormous compensation packages that they are set for life before its even clear whether they have made any positive impact on the company at all; and their contracts being what they are often means that even if they fail spectacularly, they are still awarded severance packages in the event they are fired for incompetence. A CEO that loses their job probably won’t struggle to pay their rent any time soon. So, whatever the “risk” that is being referred to, it isn’t found in the insecurity of the CEO’s compensation.
CEOs are usually provided such enormous compensation packages that they are set for life before its even clear whether they have made any positive impact on the company at all.
It’s also true that (at least in America) corporate liability law being what it is, that even if a company does something illegal, perhaps massively so, perhaps even killing people in the pursuit of profit, that the extent of the CEOs personal liability will be having to come before Congress and get berated by a panel of politicians they’ve probably already bought off, just for the sake of the cameras. I cannot remember the last time a CEO of a major corporation went to prison or was fined personally as a result of a crime that was committed by their company under their tenure. If the nature of corporate liability were different, and executives could be found personally liable for crimes committed by their companies then perhaps I could begin to understand the argument about risk, but as it is currently, I find it to be lacking merit.
But ok, I understand how someone might take issue with my specific understanding of the concept of risk in this scenario, so allow me to approach the question from a different perspective.
Michael Brooks once remarked that one of the major differences between the left and right was that the right naturalizes things while the left historicizes them. I believe that this is not only a true and pithy comment but also an important instruction for our inquiry. Looking at the trend over the past half-century, we find that the gap between CEO pay and the average worker has increased a lot. According to a study from the Economic Policy Institute, as of 2018, CEOs made 278 times the typical worker in their industries (figure C), whereas in the 1960s that figure was closer to 20 times (still a lot of money if you ask me). CEO compensation has also grown 940% since 1978, while the average worker’s pay has grown only 12%.
If the compensation of a CEO is the result of or dependent upon their risk, is it fair to say that the average CEO takes on exponentially more risk now than in 1978? I would say no — and certainly not 940% more! The job is the same as it ever was. You can say that it is difficult, personally, I believe that the guy who takes out the trash from the CEO’s office works 10x as hard, but regardless of our disagreement, I think even a defender of high CEO pay has to admit that the nature of the job hasn’t undergone some kind of fundamental change that would justify how their compensation has expanded (in direct opposition to wages of average workers which have remained nearly flat over the same period).
Similarly, is it fair to say that CEOs work 278 times harder than the average worker? I think again, even for someone inclined to defend our economic system, it’s hard to justify how wide the gap has grown.
it’s important to become comfortable interrogating the ideas which are freely presented to us, as ideology runs through everything.
If it’s not the nature of the job which explains this exponential expansion of executive compensation, then what might it be? Simple, the organizational structure of capitalist firms concentrates the majority of the decision-making power in a few (in most cases already wealthy people) who are free to use this power to expand their wealth, so of course they take every opportunity to do so. No need to find some complex technical or analytical reason, in this case, the most obvious one is the correct one. They can so they do. A successful corporation generates a large surplus and executives take from that surplus as they please. So long the major shareholders are happy with their returns, there likely won’t be any problem.
The statement that began this piece, that CEOs deserve their pay because of the risk they take on, is just the result of a clever propaganda campaign. Because of course the casual cruelty of simply saying we take what we like because we can (and because of the absence of a serious organized labor moment to oppose this seizure) is certain to have a poor reception, a facade is necessary to justify what is an absurd situation, where a small cabal makes more money than they could ever spend while millions go daily without basic necessities. This particular canard, as well as a significant percentage of what passes for mainstream economics, exists to manufacture a pseudo-scientific gloss over a situation that most people would (and do) immediately recognize as wrong.
There is a tendency when we search for answers as to why something is the way that it is to simply assume that it either has to be that way or in fact should be that way (because we want to intuitively believe that the world has order and is run by smart people who try their best to do the right thing). There is nothing inherently wrong with this impulse, however, it’s also important to become comfortable interrogating the ideas which are freely presented to us, as ideology runs through everything. In this case, upon closer inspection, what we find is that the real reason why CEOs make far too much money is that people in power, people with the authority to make decisions, desire it to be that way, for their personal gain (regardless of the consequences for others).