Q2 2022 Commentary: Pay Equality: Minimum and Maximum Wages
Pine Haven Investment Counsel, Inc.
Paige Johnson Roth, CFA®
There is no question that capitalism has created great wealth for individuals, companies, and countries. However, this system is not without its criticisms. One area that has come under increasing scrutiny is wealth inequality. In the US, there is significant political discourse about the increasing wealth and pay gap.
One area that this gap shows itself is CEO pay. The average CEO pay for Fortune 500 companies in 2021 was $15.9 Million. Some of that compensation is in term of stock options that help align the executive to the company. That number even includes CEO’s of companies that have underperformed based on stock market performance.
The ratio of current CEO pay to worker pay has increased in the past 50 years. Currently, in the United States, the ratio for CEO pay to employee pay is 350:1, up from 21:1 in 1965. The US leads the world in this category. Companies claim that they need to keep granting ever increasingly higher compensation amounts to remain competitive. It has become an increasing upward cycle. An executive pay arms race. Yet how much is enough?
Both Barron’s (July 11, 2022) and Fortune Magazine (June/July 2022) have recent lists of CEO’s and performance. They use slightly different criteria to measure performance, however, some of the pay amounts are astonishing. For example, this year Andy Jassy, newly promoted CEO of Amazon, received a compensation package of $213 million while the median annual salary at Amazon is $32,685.1
On the workers side, pay has barely kept up with inflation (and the numbers are from before our latest inflation spike). Average hourly earnings for nonmanagement private sector workers in 2018 was $22.65. Adjusting for inflation, this is the same rate as in 1987.2 Put another way, according to a report from the Economic Policy Institute Report: from 1978 to 2020, CEO pay based on realized compensation grew by 1,322%, far outstripping S&P stock market growth (817%). In contrast, compensation of the typical worker grew by just 18.0% from 1978 to 2020.
As investors, the executive pay issue does sometimes come up in proxy votes. Most corporations have advisory say on pay votes. Investors can vote against the proposed pay in these advisory votes. One organization that tracks CEO Pay and Proxy Votes is As You Sow.4 As You Sow’s senior manager, Rosanna Landis Weaver says it well “I am a capitalist. I am for improving capitalism … It’s in people’s selfinterest to contain this – because the political instability that is created by income inequality is a real danger.” At Pine Haven we will be continuing to scrutinize pay packages going forward. As always, we will continue to conduct these analyses in the context of our changing political and economic landscape.
1 Fortune Magazine. June/July 2022, “Maximum Wage,” page 109.
2 Pew Research Center (pewresearch.org), “For most U.S. Workers, real wages have barely budged in decades”
3 Economic Policy Institute (epi.org) “CEO pay has Skyrocketed 1,322% since 1978”
4 As You Sow (asyousow.org) has good review of CEO Pay and Proxy Votes.