AEI Research on Redistribution of CEO Pay Shows Negligible Impact on Rank-And-File Wages

Corporate Governance

This week, the American Enterprise Institute released a study which estimated the potential impact on rank-and-file worker pay of a complete redistribution of S&P 500 CEO compensation finding annual worker pay would be boosted at most by $69.07 per worker and demonstrating that income inequality discussions should focus on the real underlying issues, such as training and workforce development, rather than executive pay.  The purported connection between executive pay and income inequality is a common rhetorical point in discussions of the causes of income inequality.  AEI attempted to test the assertion, evaluating the impact of three CEO pay redistribution strategies on the income of the nearly 98 million workers cited by the AFL-CIO as America's rank and file.

• Redistribution of S&P 500 CEO Pay:  According to the study, the AFL-CIO reported that CEOs of S&P 500 companies earned a total of $6.75 billion in compensation in 2014.  However, redistributing that total to the nearly 98 million rank and file workers results in $69.07 in extra annual pre-tax income per worker, or about 3.5 cents per hour for a 40-hour workweek.
   
• CEO Pay Ratio of 42:1 and 20:1:  While complete redistribution of CEO pay is not commonly floated as a solution to income inequality, capping pay at a certain CEO-to-worker pay ratio is.  However, AEI finds that imposing a cap of 42:1 would only yield extra annual pre-tax income of $61.30 for the rank and file worker.  The 42:1 ratio is significant, as it was the ratio in 1980, the year that is often cited by critics of executive pay as the starting point in the explosion of executive pay.  Similarly, a ratio of 20:1—the ratio in the 1960s—would only yield a bump in annual pay of about $65.

Within the discussion of income inequality, executive pay is often criticized as a leading cause.  However, as the AEI research shows, executive pay has little impact on income inequality and instead, the focus should be on other macro-policy issues, such as worker training and job skills, which have led to the growing gap between the rich and poor.