I will concentrate on inequality in this part of looking at American decline and possible causes of it. Greed & corruption seem to be at the core of that problem too.
How is it possible that some CEOs of big corporations are paid seven-figure salaries? Meanwhile, their employees don’t have medical coverage. They are struggling to pay their bills. Some of them even depend on food-stamps.
It is one of the most stark paradoxes of modern economics. We need to examine the lack of basic benefits for employees. This helps us understand how a CEO can earn a $20 million “realized” salary. We have to look at how the “rules of the game” have changed over the last 50 years.
The explanation isn’t just one factor. It is a combination of legal structures and market theories. Additionally, there is a fundamental shift in what corporations are designed to do.
The “Shareholder Primacy” Mandate
In the 1970s and 80s, a theory called Shareholder Primacy became the dominant legal and economic doctrine. It argues that a CEO’s only legal duty is to maximize the company value for its owners. Stockholders benefit from this maximization.
- Labor as a Cost: Under this model, employee wages and benefits are seen as “expenses” to be minimized.
- The CEO as a Value-Driver: Conversely, a CEO who cuts costs, including labor costs, is boosting the stock price. This action is seen as “creating value.” This creates a scenario where a CEO is rewarded specifically for keeping worker pay low.
The Mechanics of CEO Pay (The 80/20 Rule)
A CEO’s salary isn’t actually a “paycheck” in the traditional sense. In 2024, the average S&P 500 CEO received about 79% of their compensation in stock awards and options, not cash.
- Incentive Alignment: Boards of Directors give CEOs stock. This ensures that if the company’s stock price goes up, the CEO gets rich.
- The Disconnect: Most workers are paid in cash (wages). Their income is tied to the labor market. The CEO’s income is tied to the stock market. These two markets often move in opposite directions. A company might lay off 10,000 people (bad for workers). This causes the stock price to jump (great for the CEO).
The “Market for Talent” vs. “Commodity Labor”
Corporations treat CEOs and entry-level workers as two different types of “goods”:
- The CEO “Superstar”: Boards believe there is a very small pool of people capable of running a global corporation. They engage in “benchmarking.” They look at what other CEOs make and try to pay more. This is to attract the “best,” leading to a continuous upward spiral of executive pay.
- The Replaceable Worker: Lower-level roles are often treated as “commodities.” If an employee leaves because they don’t have health insurance, the company will find a replacement. They assume they can hire another person from the large pool of available labor. In many cases this is made possible by increased intake of foreign migrants. It increases supply side of the labour market and keeps wages down.
Institutional Power and “Board Capture”
The people who set CEO pay are the Board of Directors.
- The Social Circle: Boards are often made up of other CEOs or high-level executives. This is sometimes called “Board Capture” or “Elite Networks.” The people setting the salary are often socially incentivised to keep executive pay high. They are also professionally incentivised.
- Weakened Labor Power: Historically, unions negotiated for medical coverage and fair wages. As union membership declines in many sectors, workers lose their collective bargaining power. This loss has caused the CEO-to-worker pay ratio to increase significantly. America was “Great” when unions were strong.
The Growing Gap: A Historical Snapshot
| Year | CEO-to-Worker Pay Ratio |
|---|---|
| 1965 | 21:1 |
| 1989 | 61:1 |
| 2024 | 281 : 1 (Average) |
| 2024 (Starbucks) | 6,666:1 |
I would not stop for a coffee in Starbucks even if they offer it for free. Would you?
Why this is a “Success” Problem
Many experts now argue this gap is bad for business. Research shows that when the ratio exceeds 40:1, employee productivity begins to drop due to “perceived unfairness.” High-ratio companies also have higher turnover, which is a massive hidden cost.
To be continued.
To see Part 1 click here