Why Are CEOs Paid 361 Times More Than Their Average Employees?

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In 1980 the average CEO-to-worker pay ratio was 42:1. In 2017 the ratio was 361:1. Total CEO compensation averaged $13.94 million last year, compared to just $38,613 for the average production and non-supervisory worker.

We’ve all seen numbers like this so many times now that we barely even blink at a new set. There is, however, new research that may partly explain why this gap has gotten so wide.

The CEO-to-worker pay data were reported Wednesday morning by the AFL-CIO in an update to the union’s Executive Paywatch database and website. The data were compiled from disclosures by companies of the ratio of CEO pay to the median worker’s pay required for the first time last year in federal financial filings.

New research by Harvard Ph.D. candidate Nathan Wilmers, published Wednesday by the Washington Center for Equitable Growth, indicates that increased pressure from large corporate buyers suppresses wages for the workers in the buyer’s network of suppliers. Thus, large corporate buyers like Boeing and Walmart exercise outsized influence on the wages of their suppliers’ workers. Wilmers writes:

[B]ig corporate buyers are able to demand lower prices for the goods and services they are buying, and suppliers and contractors must sell at lower prices and try to cut costs. Likewise, companies increasingly outsource noncore functions, including food service, janitorial, and security jobs, a phenomenon known as the fissured workplace. The result is that more and more workers are employed by intermediate employers, which in turn rely on sales to outside corporate buyers.

That’s not particularly startling, but it is where the story begins to get more interesting. Wilmers proposes three reasons to explain what’s happening: larger buyers can pressure suppliers to accept lower profits; outside buyers enjoy a social distance from their suppliers’ workers, allowing the buyers “to ignore the fairness norms and social pressure that directly employed workers can use to increase their pay”; and, finally, the benefits of labor cost-cutting are concentrated among one or a small number of buyers.

Wilmers admits it’s hard to test these proposed reasons, but using publicly reported data from companies that must name customers responsible for 10% or more of annual revenue and combining that with wages at publicly traded supplier companies he was able to calculate that “a 10 percent increase in revenue reliance on dominant buyers is associated with suppliers’ wages declining by 1.2 percent.” Wilmers continues:

This pattern holds even conditional on controls for firm-level bargaining, productivity changes, and other market determinants of workers’ wages. The longer the buyer-supplier relations last, the more wages fall—consistent with the social distance between outside buyers and suppliers’ workers blunting wage norm effects. I also find that mergers among buyers reduce suppliers’ wages, suggesting it is not “unobserved supplier selection” (such as changes in business strategies by suppliers) that drives wage effects, but rather power exercised by dominant buyers. Indeed, the negative wage effects of reliance on large buyers have been intensifying over time.

When CEOs rhapsodically proclaim that their latest merger will create synergies that save X billions of dollars and boost shareholder returns by Y billions, it might be well to remember the human cost of those synergies.

It is also worth remembering that CEOs are rewarded for identifying and realizing those synergies. And those rewards are generous indeed. According to the AFL-CIO’s Executive Paywatch data, the widest difference between CEO pay and that of the average worker was posted by Weight Watchers International Inc. (NYSE: WTW), where CEO Mindy Grossman was paid 5,908 times the average worker’s pay. Mattel Inc. (NASDAQ: MAT) CEO Margaret Georgiadis was paid 4,987 times what the average Mattel worker was paid. Fran Horowitz, CEO of Abercrombie & Fitch Inc. (NYSE: ANF), was paid 3,431 times what the average worker made last year.

Visit the AFL-CIO website for more data and details on CEO pay. The Nathan Wilmers article is available at the Washington Center for Equitable Growth.