Have you ever heard of the CEO-to-worker ratio? This ratio measures how much the Chief Executive Officer (CEO) earns compared to the workers. It can pertain to an industry, a specific company, or a group of companies where the average salary of the CEO is compared with the average salary of the workers. Why does this measurement matter? Because it reflects something about our economic system. A larger salary for a CEO compared to a worker is typically justified based on the CEO having more experience, more responsibility, and being more productive. However, how wide can that ratio be to be justified? How much more does a CEO truly contribute to the prosperity of the firm compared to its workers? Is it 5-1? 10-1? Let’s say a typical worker earns €3500 per month; a 5-1 ratio would mean that the CEO earns €17500. Would that be reasonable? You might argue it depends on the size of the firm. However, the ratio is far from 1-5. Here are some statistics:
In 2021, the CEO-to-worker compensation ratio was 399-to-1.
In 2020, the ratio was 366-to-1.
In 1989, the ratio was 59-to-1.
In 1965, the ratio was 20-to-1.
What does this mean? It means that CEO wages have increased way more than those of typical workers. From 1978 to 2021, CEO compensation grew by 1,460%. In contrast, the compensation of the typical worker grew by just 18.1% during the same period. For example, McDonald’s CEO Chris Kempczinski earned 2,251 times more than the average McDonald’s worker, and Starbucks’s ex-CEO, Kevin Johnson, earned 1,579 times more.
This ratio also varies between different countries. According to Statista, the ratio is higher in the United States and lower in countries such as China and Germany. According to a BBC article referring to OECD data, the ratio in Sweden is 60-1, which means a CEO in Sweden only needs 5.5 days to earn a typical worker's yearly salary.
Ratio between CEO and average worker pay in 2018, by country. Source: Statista
Another perspective that needs to be added is that, given the current high inflation rates in Sweden and internationally, wages adjusted for inflation have decreased in the last couple of years, making the situation even worse for typical workers and the poor.
Real wages percentage change between 2020 and 2022. Source: Medlingsinstitutet
Where does this growth come from?
It comes from CEOs having more power to set their wages, but also from a significant portion (80% in the US, according to the Economic Policy Institute) of their compensation being stock-related. In other words, CEOs benefit from profits and stock market performance, while typical workers do not. This strong trend of increasing CEO compensation has also concentrated more wealth into the hands of the top 1% or 0.1% of the population, making the remaining 90% poorer in comparison. Inequality has skyrocketed, and this is one of its drivers.
What to do about it?
Inequality is not only morally wrong; it also harms the economy. This ratio needs to decrease, and typical workers must be better compensated for their contribution. That means strengthening unions and their bargaining power, increasing their ability to have a say in top compensation. It also involves increasing the income tax of the top earners in the economy and implementing and enforcing regulations that prevent firms from gaining large market shares. It is healthier for the economy to have several smaller firms competing. Moreover, it is healthier for society if typical workers can earn a good living while CEOs are fair, not fairy-tale, compensated.
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