Executives at large American firms earned 878% more, adjusted for inflation, in 2022 than they did in 1978, while average worker compensation rose just 4.5% over the same period, according to a recent report examining the widening gap between CEO and worker pay.
The escalating disparity, first prominently noted by Forbes magazine in 1970 with the publication of the Forbes 800 scorecard, has shifted dramatically from a period before 1970 when worker pay increased at a faster rate than executive compensation. Between 1938 and 1970, worker pay saw the highest growth rate at 6.1% annually, while CEO pay grew at only 0.1% per year. After 1970, this trend reversed, with CEO pay increasing by 4.6% annually while firm value growth slowed to 5.2%.
In 1965, CEOs earned 21 times more than the average worker. By 2023, that ratio had climbed to 290. For 100 companies within the S&P 500, the ratio reached 603 in 2022. The report attributes this change to increased visibility of executive compensation, the growth of executive search firms operating on contingent fees, and what researchers describe as a “dysfunctional automatic response” in the human brain to increased pay visibility.
The trend is occurring as companies increasingly face pressure to attract talent by offering higher salaries to new hires, sometimes exceeding the pay of existing employees in comparable roles. This practice, while intended to secure skilled workers, is becoming more visible due to increased pay transparency driven by regulatory changes and technological advancements. A recent survey of over 30,000 employees indicated salaries are expected to rise by an average of 4% in 2024, potentially exacerbating existing pay gaps.
Research from Harvard Business School indicates that employees often misperceive the salaries of both their managers and peers, but discovering that managers earn more than expected can actually motivate employees to work harder. Conversely, learning that peers earn more does not have the same effect. The study, conducted with a sample of 2,060 employees at a multibillion-dollar corporation in Southeast Asia, suggests that career concerns and social preferences play a role in these responses.
Experts suggest that addressing pay disparities requires proactive advocacy from managers, who should make a business case for fair compensation during leadership meetings, linking pay equity to both individual performance and broader diversity, equity, and inclusion (DEI) values. However, a Harvard Business Review article notes that great intentions to correct pay imbalances often fall short without the necessary tools for swift and effective implementation.
The U.S. Chamber of Commerce projects a shrinking workforce in 2024, potentially intensifying competition for talent and further contributing to upward pressure on salaries.
