CEO pay is a significant source of political and social grievances. According to the Economic Policy Institute (EPI) report cited in the article, the CEOs of leading U.S. firms have earned an average of $15.6 million in 2016, whereas the average American worker earned $58,000. The report shows an increase of 937.6% in annual compensation for CEOs and 11.2% for workers since 1965. Those figures reveal a dramatic ongoing increase in income inequality. Although the connection between income inequality and economic growth remains a contentious question, studies have shown that inequality can hinder growth by causing governments to introduce redistributive taxation. Furthermore, by concentrating wealth in the hands of a few, it reduces the purchasing power of the majority of consumers, decreasing aggregate demand and GDP. This tendency has a real social cost, which should not be overlooked.
However, any attempt to reduce this cost must be carefully considered to avoid unintentionally inflicting greater harm. The report alleges that CEO pay is determined solely by their ability to set it, with no connection to their actual effectiveness. The economists cited in the article state that there is no objective standard for what a CEO should be paid. As they point out, companies wishing to attract top talent for such a demanding position are forced to offer high salaries. In other words, it is a reflection of a seller’s labor market for CEOs. EPI recommends using fiscal measures to motivate companies to reduce CEO pay, claiming that it would have no impact on outcomes. This assertion is hard to prove without a reckless experiment that could critically undermine companies and drive up unemployment. In the absence of surer solutions, it may be better to accept high CEO pay and mitigate the effects of inequality by investing in human capital through education programs.