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CEOs made 287 times more money last year than their workers did

Companies have finally started reporting CEO-worker pay ratios. Now we know why they fought so hard to avoid it.

Workers assemble cars on the line at Tesla’s factory in Fremont, California, in February 2015. Elon Musk made 40,668 times more money than the median Tesla employee last year.
David Butow/Corbis via Getty Images

After years of kicking and screaming, corporate executives have finally released pay data on what their CEO makes versus their median worker.

Unsurprisingly, the gap is obscene. The average chief executive of an S&P 500 company earned 287 times more than their median employee last year, according to an analysis of the new federal data released Tuesday by the AFL-CIO labor federation. America’s CEOs earned a staggering $14.5 million in 2018, on average, compared to the average $39,888 that rank-and-file workers made. And CEOs got a $500,000 bump compared to the previous year, while the average US worker barely got more than $1,000.

This is the first year in which all public companies were required to disclose CEO-to-workers pay ratios in filings with the US Securities and Exchange Commission. Before, companies only needed to report compensation for their top executives.

The new disclosures — largely opposed by corporate America — are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The purpose is to provide shareholders with more information to judge corporate behavior — and to shame executives for their excessive pay.

Chief executives at America’s largest companies don’t get paid the way the average worker does. Beyond a set salary, CEOs’ compensation packages include other forms of income, such as bonuses, company stock options, and long-term incentive payouts, which can vary based on performance and the status of the stock market.

The new analysis relies on the most conservative measure of CEO pay, based on the value of stock options when they were awarded to executives, not when they were cashed out.

Companies that rely on low-wage, part-time workers were among those with the largest pay disparities. Tesla had the most shocking one: Elon Musk made 40,668 times more money than the median Tesla employee. Among the largest US companies, the clothing brand Gap had the largest disparity. CEO Arthur Peck made 3,566 times more than the median company employee, who only made about $5,800. McDonald’s, Foot Locker, and Estee Lauder reported jaw-dropping pay gaps, too.

Here are the top ten companies in the S&P 500 with the largest pay ratios:

AFL-CIO Executive Paywatch report 2018

Meanwhile, the travel website and the financial advising firm Berkshire Hathaway had the smallest pay ratios.

The AFL-CIO’s analysis also listed the CEOs who made the most money last year. Discovery CEO David Zaslav was at the top, making about $130 million. Disney CEO Bob Iger was up there too, with a $66 million payout. So was James Murdoch, CEO of 20th Century Fox. Here are the rest:

AFL-CIO Executive Paywatch report, 2018.

These pay ratios illustrate a fundamental flaw in the US economy — one that triggered a record number of labor strikes last year: The rich have been getting much wealthier in the past few decades, at the expense of everyone else.

In the past 10 years, chief executives at S&P 500 companies saw their pay grow by about $5 million, while rank-and-file workers just got about $7,858 — barely enough to keep up with inflation.

Liz Shuler, secretary treasurer of the AFL-CIO, points out that stagnant wages explain why the average US worker can’t afford a two-bedroom apartment in 15 of the largest cities in the country. “Something is clearly broken,” Shuler said on a call Tuesday with reporters.

The cause of this breakdown is no big mystery.

Reagan-era policies are largely to blame

Economists have different theories for why CEOs are making so much money. Some say it’s a reflection of their skills and market value, others believe it’s because they have too much power in setting their own pay. Both may play a role, but there is another theory that’s viable: Starting with the Reagan tax cuts passed the 1980s, CEOs have more incentive than ever to inflate their pay.

Vox’s Ezra Klein put it this way:

“Consider that for much of the post–World War II era, paying your CEO a lot of money didn’t make much sense because the government would simply tax it all away. Top marginal tax rates on income were above 90 percent. President Ronald Reagan’s tax cuts sent those top rates tumbling, and so a CEO who could negotiate a much bigger salary could also keep a much bigger salary.”

Capital gains tax rates, which tax income earned from stocks, have also plummeted since Reagan’s cuts.

But there is another Reagan-era policy that has contributed to skyrocketing CEO pay: stock buybacks. Corporate executives have spent trillions of dollars buying back their company’s own stocks since the 1980s to temporarily boost its value.

It was never strictly illegal to do this, per se, but federal law bars companies from doing anything to manipulate their stock prices. Companies knew that if they did a stock buyback, it could open them up to accusations from the Securities and Exchange Commission of trying to manipulate their stock price, so most just didn’t. Reagan, though, changed that.

In 1982, his administration created rule 10b-18, which provides a “safe harbor” for companies in stock buybacks. As long as companies stick to specific parameters — such as not buying more than 25 percent of the stock’s average daily trading volume in a single day — they won’t be accused of stock manipulation.

Over the past 15 years or so, firms have spent an estimated 94 percent of corporate profits on buybacks and dividends. That means companies are barely investing any of their profits in their companies, or workers. Which is why we end up with charts that look like this.

This graph shows the ratio of CEO pay (two different measures) to the typical US worker’s pay over the years.
Economic Policy Institute

After congressional Republicans slashed taxes again in 2017, another stock buying frenzy took off. Instead of investing the bulk of those tax savings in the companies and their workers, executives spent most of the extra money buying their own stocks. And because CEOs earn most of their compensation from company stocks, they essentially gave themselves huge raises with the tax cuts. The average worker, meanwhile, just got a few extra pennies.