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Your Periodic Reminder that CEOs Maximize CEO Pay, Not Shareholder Returns

Summary:
It is a cult among policy types to say that CEOs maximize shareholder returns, as in this NYT piece. This is in spite of the fact that returns to shareholders have not been especially good in the last two decades. And, this is even though returns were boosted by a huge corporate tax cut in 2017 that increased after-tax profits by more than 10 percent, other things equal. There is considerable evidence that CEOs do not earn their million pay, in the sense of providing million in additional returns to shareholders, compared to the next schmuck down the line. This matters in a big way because CEO pay influences pay structures throughout the economy. If CEOs got paid 20 to 30 times the pay of ordinary workers, like they did in the 1960s or 1970s, or around million to million a

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It is a cult among policy types to say that CEOs maximize shareholder returns, as in this NYT piece. This is in spite of the fact that returns to shareholders have not been especially good in the last two decades. And, this is even though returns were boosted by a huge corporate tax cut in 2017 that increased after-tax profits by more than 10 percent, other things equal.

There is considerable evidence that CEOs do not earn their $20 million pay, in the sense of providing $20 million in additional returns to shareholders, compared to the next schmuck down the line. This matters in a big way because CEO pay influences pay structures throughout the economy. If CEOs got paid 20 to 30 times the pay of ordinary workers, like they did in the 1960s or 1970s, or around $2 million to $3 million a year, the next in line execs would likely get around $1.5 million and the third tier corporate execs would get in the high hundreds of thousands. That is a contrast from today when the CFO and other top tier execs might get close to $10 million and the third tier can easily make $2-$3 million. 

In that world, a university president would probably make around $400,000 to $500,000, with corresponding reductions in pay for other top administrators. The same would be true for foundations and other non-profits, as well as government. Perhaps the fact that people’s whose pay is inflated, at least indirectly, by high CEO pay, largely set the terms of debate in this country, explains why the untrue claim that corporations are run to maximize shareholder returns is taken as gospel. 

The post Your Periodic Reminder that CEOs Maximize CEO Pay, Not Shareholder Returns appeared first on Center for Economic and Policy Research.

Dean Baker
I am a senior economist at the Center for Economic and Policy Research (@ceprdc). I also run the blog Beat the Press (@beat_the_press)

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