Opinion | CEOs are grossly overcompensated while workers suffer

Nearly every large company in the United States laid workers off, furloughed them or cut their salaries last year, all the while paying their CEOs incredible amounts of money.

After losing $4 billion, Norwegian Cruise Lines doubled the pay of CEO Frank Del Rio to $36.4 million. Hilton, the world’s second-largest hotel company, laid off about 22% of their global corporate staff before paying their CEO, Chris Nassetta, nearly $56 million.

And what’s Nassetta’s take on the year? He told investors he’s “pounding the table with optimism” and will be able to “return even more capital than we were pre-Covid to our shareholders.”

The nearly uniform decision of companies to lavish CEOs with tens of millions of dollars while actively decimating the lives of their workers is both a gross moral failure and a clear indictment of a rancid systemic problem.

Hundreds of CEOs at large companies have the power to radically improve and even save lives, yet every year they actively fight against doing so. It is reprehensible that these CEOs can justify spending billions on less important things like space travel while neglecting their moral duty to use their power for immediate relief of suffering.

Let’s be reasonable, though. CEOs aren’t going to give up millions of dollars based on a few columns about their moral failings, no matter how egregious they are. They’re going to hold on to as much money as they can get their hands on — as most of us would in their positions — until their systemic incentives change.

CEOs at large companies are paid mostly through shares of their company, with direct payments making up only a tiny amount of their compensation. Often, they are awarded shares in the form of stock “options,” which we’ll return to in a moment. 

On the surface, this makes sense — since CEOs are given a stake in their company, they are incentivized to make sure the company does well.

There are two main reasons it doesn’t work out that way. First, the price of a company’s shares fluctuate on the whims of an elitist, capricious system. A company’s stock price likely reflects nothing about how workers at that company are faring.

The fact that, after an initial dip, the S&P 500 index soared while the COVID-19 pandemic raged highlights Wall Street’s detachment from reality. Shares in the index recovered from that initial dip by August, when daily COVID-19 cases topped 50,000. Both case counts and share prices only continued to grow from there.

The second reason compensating their CEOs with shares doesn’t work is that companies engage in stock “buybacks.” 

Stock buybacks are when a company uses excess cash to repurchase shares of their own company that had been sold to other people. Since there are then fewer shares available, the price of the shares gets bid up by people who want to purchase them.

Therefore, after doing absolutely nothing to improve their company’s ability to produce goods and services, the share price skyrockets and CEOs make millions of dollars instantly.

It sounds like market manipulation because it is. Or at least, it was — buybacks were illegal until 1982, when President Ronald Reagan’s administration legalized them on the absurd basis that any profit businesses make, going to any person, is a good thing. In reality, buybacks funnel money to already-wealthy investors, increasing inequality.

It gets even worse, though. The stock options mentioned earlier allow CEOs to buy or sell shares of their company at a set price, meaning that they are completely insulated from the risk that comes with owning them.

When the share prices skyrocket, CEOs can buy shares at their preset, lower price, and then immediately turn around and sell them for the higher market price, further increasing their ridiculous amount of compensation.

But it’s not just the workers of any particular company that suffer from these practices. The money used for buybacks should be going to research and development inside of these companies, increasing their long-term viability and growing the country’s economy.

Instead, it’s been estimated that rising inequality in the United States reduced cumulative GDP by five percentage points between 1990 and 2010. The most painful effects of that slower growth are felt by poor families, but their reduced purchasing power also hurts companies’ ability to sell goods and services.

Some argue that CEOs should be paid staggering sums of money because of the value they’ve created for their companies. But even though there are great leaders out there who should be richly rewarded, no one is such an incredible leader that they deserve the current amount of CEO compensation.

They were probably good leaders, but they were also incredibly lucky to be in the right place at the right time. I think there are probably hundreds, if not thousands of people out there as smart and capable as Amazon CEO Jeff Bezos who just didn’t happen to bet on an online bookstore becoming successful in the early 2000s.

The government should step in when there is a clear, systemic problem that hurts everybody, and CEO compensation falls into that category. There are three things that the government can do to begin to address this problem.

First, ban stock buybacks again. They’re market manipulation and should be treated as such. 

Second, increase the capital gains tax — the tax on how much money is made on things that are traded, such as stocks.

And finally, institute a plan to tie CEO compensation to the pay of the median worker at that company. Right now, CEO pay at large companies is, on average, 320-1 compared to their median worker. That’s up from 21-1 in 1965, according to the Economic Policy Institute. 

If CEOs have to keep that ratio under a certain level, they would need to pay their workers more, or themselves less. Sen. Bernie Sanders, I-Vt., has an excellent plan that would steadily increase taxes on businesses the worse their ratio is and use the money raised to fight inequality.

Disproportionate CEO compensation is a gross moral failure affecting the well-being of every American who isn’t already ultra-rich, and the government needs to step in to address the situation. Left unchecked, large companies will only continue to overcompensate their CEOs, disregarding their companies’ long-term health and exacerbating inequality in America.

Lucas DiBlasi writes primarily about politics, economics and music. Feel free to email your opinions on Weezer (or whatever else) to him at LND28@pitt.edu.