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Why Has The U.S. CEO-To-Worker Pay Ratio Increased So Much?

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Authored by Jesse Colombo via Forbes.com,

MarketWatch recently published a piece about the soaring U.S. CEO-to-worker pay ratio, which hit 278-to-1 in 2018 (up from just 58-to-1 in 1989 and 20-to-1 in 1965) –

Nice work if you can get it.

CEO pay has increased 1,008% between 1978 and 2018, while typical worker pay has edged up 12%.

That’s according to analysis from the left-leaning Economic Policy Institute, providing new data on the depth of income inequality.

In 2018, CEOs in the country’s top 350 businesses were paid $17.2 million on average. Employees working in those industries — ranging from retail to technology and manufacturing — typically earned $64,500, researchers said.

Overall, there’s a 278-to-1 pay ratio between workers and CEOs. In 1989, the compensation ratio was 58-to-1 and in 1965, it was 20-to-1.

Stock awards and cashed-in stock options averaged $7.5 million of CEO pay in 2017 and 2018, the study added.

Incorporating stock in pay arrangements is one way to incentivize CEO, and rising salaries illustrate the market for talent in the C-suite, some observers say.

Left-leaning economists, politicians, and other commentators frequently use the soaring CEO-to-worker pay ratio as an example of why capitalism is inherently flawed and always leads to the rich getting richer, but my research has found that it is a byproduct of central banking and fiat (i.e., “paper”) currency rather than capitalism. To make a long story short, the Federal Reserve has excessively inflated the financial markets in its attempt to create an economic recovery from the Great Recession. This excessive asset price inflation has pushed U.S. household wealth far out of line with its historic relationship to the GDP, as the chart below shows. The wealthy have been the greatest beneficiaries of this asset price inflation because they own a disproportionate share of the assets that have been inflated by the Fed, which are stocks, bonds, and high-end real estate.

U.S. Household Net Worth As Percent Of GDP

The Fed’s inflation of the U.S. stock market is the primary reason why the CEO-to-worker pay ratio has increased so much. The CEOs of public corporations usually receive stock options as part of their compensation packages, which means that they can benefit greatly when their stock prices rise. As the chart below shows, the CEO-to-worker pay ratio surges during asset bubbles, but falls back down when the bubbles burst (it correlates with the chart above). The current asset bubble is no different and the excesses will be corrected in the form of a strong bear market, just like they always are.

CEO To Worker Pay Ratio

To summarize, it’s not fair to blame the free market or capitalism for market distortions created by central banks like the Fed. Any person or organization that is genuinely interested in finding solutions to our society’s problems should keep an open mind regarding all possible explanations about what is causing those problems. If you are interested in learning more about this topic, please read my detailed recent report called “The Truth About U.S. Inequality.”

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