How I see it: The Compensation Conundrum: Are CEO Pay Increases a Constant?
Listen to this story:
One of the proudest moments of my career happened shortly after becoming a manager a few years ago. I was able to help a seasoned and highly experienced employee achieve a six-figure salary through a strong case to HR. I felt proud to have done it. In management, I could see the salaries and promotion cycles of the highest-paid and lowest-paid workers, and this is where my naivete struck. The more you are paid, the lower your annual increases.
The Compensation Conundrum
Of course, it makes sense in hindsight, at least from a percentage perspective. You can’t continually expect to receive the same or higher percentage bump year over year. Logically speaking, wages would increase exponentially, much to the horror of CFOs everywhere.
CEO Compensation Unveiled
But this doesn’t always hold true. There appears to be a point at which one can make so much money that the percentage increases again. Is there a mathematical formula for this? Surely, this must be an undiscovered phenomenon as the United Auto Workers (UAW) argue that CEO pay for the Big Three US Auto companies went up 40% over the past four years, while theirs went up only 6%.
Related Article: How I see it: Can’t See the Trees For the Forest
Exploring the “CEO Variable”
A formula to explain this must require a particular variable, perhaps. Per an Economic Policy Institute study, from 1978 to 2020 CEO pay has grown 1,322.2%, 60% faster than the stock market. The ratio of CEO-to-worker pay was reported to be 398:1 in 2021 (Statista). It appears that the “CEO” variable must need to be included.
A Proposed Theorem
Perhaps a theorem is warranted to explain this phenomenon: As workers’ wages increase, the annual increase percentage decreases, unless you are a CEO. A CEO’s annual increase is a constant. (credits roll)
We had a lot of fun today at the expense of CEOs, but being a CEO is no easy task. If you or a loved one knows of or is a CEO whose pay ratio is too high, take comfort that organized movements are looking to correct this issue for them.
The Reality of CEO Roles
Seriously, In the world of compensation, patterns can sometimes defy our expectations. As we’ve explored, there’s a unique dynamic at play when it comes to CEO pay increases, challenging the conventional wisdom that higher salaries should mean lower annual bumps. While the theorem presented here may be a playful thought experiment, the reality of CEO roles is complex, with significant responsibilities and pressures.
Yet, as we ponder the intricacies of compensation, it’s essential to advocate for transparency, fairness, and equity in all pay structures. Whether you’re an employee, a manager, or a CEO, understanding these dynamics and supporting efforts to address inequity remains crucial in our ever-evolving corporate landscape.
This article is contributed by Matthew Sekol. Every week ESG News delivers smart commentary from ESG practitioners and experts to unpack issues of the day. Submit an article for editorial consideration for the ESG Unpacked series here: [email protected]