The 11-figure pay package for Tesla CEO Elon Musk is back on the table. A thumbs-up vote by Tesla’s shareholders last week reaffirms a plan that could pave the way for Musk to earn billions on the job. This news shines a fresh spotlight on the wide pay discrepancy between CEOs and rank-and-file workers in America.
It’s no secret that worker pay is a fraction of what the highest-paid executives in the corner office take home. Recent CEO compensation studies illustrate how top-heavy the nation’s pay scale is. They also show how wide the pay gap is between top executives and workers farther down the organizational chart.
“Excessive CEO compensation is the root cause of dissatisfaction with the economy and certainly the perception of the economy,” said Andy Behar, CEO of As You Sow. The non-profit foundation promotes corporate social responsibility and has conducted a pay study for the past 10 years titled “The 100 Most Overpaid CEOs.”
“It defines this (feeling of) lack of equity and really polarizes society,” said Behar. “When you see Elon Musk on the front page of the newspaper getting a $40 billion, $50 billion package, or what it would take the median worker to earn in ... three centuries, it’s disturbing and disorienting. People look at their lives and go, ‘Well, what about me?’”
Musk’s controversial pay package includes 303 million stock options, valued at $56 billion in 2018 when first approved by the board before being struck down in January by a Delaware judge. Tesla shares are worth less now, so the pay package is closer to an estimated $45 billion today. (Tesla must still get the Delaware judge to reinstate Musk’s pay package.)
How do you compare?
The latest study by AFL-CIO Paywatch shows that CEOs of S&P 500 companies received an average total compensation of $16.7 million in 2022, the second-highest level of CEO pay in history. By contrast, the current average hourly wage for all U.S. employees is $34.91 — which translates to an annual pay of about $62,244, according to data from the U.S. Bureau of Labor Statistics. It would take a regular employee 272 years to make what the average CEO running an S&P 500 company makes in a single year.
So, are you rich? To be in the top 1% of Americans, you'd need to amass a net worth of $11.6 million.
With an average annual pay package of $16.7 million, U.S. CEOs are earning more than the entire average net worth — that may be earned over a lifetime — of the richest 1% of Americans every year. They are, to put it mildly, the super-rich.
The CEOs of S&P 500 companies who earned the most compared to workers include retail companies like Abercrombie & Fitch, where workers typically have low wages, according to AFL-CIO data. But also included are companies like Live Nation Entertainment, whose CEO Michael Rapino received $139 million compensation, or 5,414 times the average salary of the company's workers.
“CEO-to-worker pay ratios remain unacceptably high, and is a sign that companies suffer from a winner-take-all philosophy,” the AFL-CIO report concluded.
Is high CEO pay worth it for investors?
The largest piece of CEO pay packages is not the salary, but stock awards tied to top executives meeting certain performance metrics. That’s a big reason Hock Tan, CEO of Broadcom (AVGO), topped AP’s survey with a pay package valued at about $162 million. The company granted stock awards valued at $160.5 million on Oct. 31, 2022, for the company’s fiscal year, according to AP. (Stock awards typically cannot be cashed in overnight; the timing of share sales is outlined in a vesting schedule.)
So, was Mr. Tan's enormous pay package worth it to investors? With a stock price that grew just over 100% over the past year, many Broadcom shareholders might consider this pay a reasonable cost for holding onto a high-performing CEO. In fact, investors usually vote in support of executive pay packages at annual shareholder meetings. These "say on pay" proposals typically garner votes of 90% in favor of management's compensation plans. The CEO usually has serious performance issues when a say on pay vote fails. For example, Netflix shareholders voted overwhelmingly against a large pay package for executives during the writers' strike in 2023.
On the other hand, there is evidence that very high CEO pay packages do not necessarily lead to outsized market performance on average. For example, the report from As You Sow found that “the companies with the most overpaid CEOs have had lower shareholder returns than the average S&P 500 company.” While the typical S&P 500 company posted annualized returns of 8.5% from February 2015 to September 2023, the 100 Most Overpaid CEOs annual returns lagged at 7.9%.
And workers who feel underpaid and undervalued compared to far richer executive compensation packages are often less likely to view their financial position positively, said Behar.
Critics of exorbitant executive pay say it sends the wrong message to the American workforce.
“Extreme pay gaps send a message to workers that their company's board views the CEO as almost single-handedly responsible for company value,” said Sarah Anderson, global economy project director and Inequality.org co-editor at the Institute for Policy Studies. “This undermines enterprise effectiveness because when employees' contributions are undervalued, they feel like they'd be foolish to give their all to the job.”
Anderson disputes the corporate board notion that no price is too high to hang on to top talent.
“When CEOs are making hundreds — and sometimes even thousands — of times more than ordinary workers, there’s no real justification,” said Anderson, adding that there’s no shortage of studies showing no correlation between high pay and high performance.
