The ‘Secret’ That Gets CEOs Rich: Keep Workers Poor

How far off the charts has compensation for America’s top corporate CEOs soared? Let’s use Peter Drucker as our reference point.

Management theorists today generally give Drucker, a refugee from Nazism in the 1930s, the credit for essentially laying down “the foundations of management as a scientific discipline” after World War II. Drucker’s classic 1946 study of General Motors established him — for leaders throughout business and academia — as the nation’s foremost authority on corporate enterprise effectiveness.

That effectiveness, Drucker believed, had to rest on fairness. Corporations that compensated their top execs at rates that far outpaced worker pay created cultures where a systematic commitment to organizational excellence could never take root.

In the two decades after World War II, America’s leading corporate chiefs by and large accepted Drucker’s perspective. They may have felt they didn’t have much of a choice. From distinguished thinkers like Drucker outside corporate boardrooms came exhortations for fair-minded pay policies. From unions inside the nation’s most powerful corporate empires came fierce pressure to share the wealth.

And that wealth did get shared. In 1965, the Economic Policy Institute notes, major corporate CEOs in the United States were only realizing 21 times the pay their workers were pocketing. That gap would remain fairly modest over the next dozen years, only reaching 31 times in 1978.

But this relatively slight upward nudge unsettled Drucker. Corporate outliers, he believed, were beginning an about-face from America’s post-war corporate pay consensus. A relative handful of top corporate execs, Drucker noted in a 1977 Wall Street Journal analysis, were actually taking in pay packages nearing an until-then unimaginable $1 million a year.

For Drucker, the rationales corporations offered for these new enormous pay packages amounted to “nonsense” and “pure hokum.” Companies faced no unforgiving “need” to pay “market price” for their execs. Stock options did not “promote performance.”

Those options and other maneuvers designed to escalate executive take-homes, Drucker added, were doing “enormous damage.” Excessive rewards for top executives, he explained, nurture the bureaucratic structures that undercut organizational effectiveness.

How so? In any bureaucracy, every level of hierarchy must get compensated at a higher rate than the level below. The more levels, the higher the pay at the summit. Endless levels of hierarchy would remain appealing to executives, Drucker argued, as long as they prop up and push up executive pay. His solution? To make bureaucratic hierarchies less appealing to top execs, limit executive pay. No executives, Drucker believed, should be allowed to make more than 25 times the compensation of their workers.

“A ratio of 25 to-1 is not ‘equality,’” Drucker acknowledged. “But it is well within the range most people in this country, including the great majority of rank-and-file workers, consider proper and indeed desirable.”

Drucker lived long enough — he died in 2005 at age 95 — to see Corporate America make a mockery of his 25-to-1 standard. But research since his death has consistently reaffirmed his take on the negative impact of wide CEO-worker pay differentials on organizational effectiveness.

The mockery of Drucker’s contribution, meanwhile, continues, as the just-released 28th annual edition of the Institute for Policy Studies Executive Excess report details in eye-opening detail.

This year’s Executive Excess zeroes in on the 300 major U.S. corporations that pay their median — most typical — workers the least. At these 300 companies, CEO pay last year jumped an average $2.5 million to $10.6 million. Typical worker pay at the 300 firms increased on average as well, but the increase still left median annual worker earnings at the 300 companies under $24,000.

Overall, CEOs at the 300 major U.S. corporations with 2021’s lowest median worker pay averaged 670 times the annual earnings of their most typical workers, up from 604 times the year before.

Workers at over 100 of these firms did far worse than the average figures. In 106 of the 300 corporations, median worker pay didn’t even keep with inflation.

“Did the workers at these 106 companies lose ground to inflation because their employers lacked the wherewithal to make sure wages kept up with rising prices?” the new Executive Excess report asks. “Hardly. In fact, 67 of these firms spent many millions last year buying back their own shares. These repurchases totaled $43.7 billion.”

So what can we do to restore the reasonableness in corporate compensation that Peter Drucker spent six decades of his life working toward? The new Institute for Policy Studies Executive Excess report offers up a list of concrete steps that could make a fairness — and effectiveness — difference. Given the current make-up of Congress, most of these steps have no shot at near-run enactment.

But Executive Excess 2022 does highlight one step that the Biden administration could implement — to great effect — via executive action. The administration could use that action “to give corporations with narrow pay ratios preferential treatment in government contracting.”

Various federal programs already offer a leg up in contracting to targeted groups, typically small businesses owned by women, disabled veterans, and minorities. These programs sometimes involve set-asides, other times give up to a 10 percent credit in bidding competitions. All these existing preference programs, the new Executive Excess notes, tap the power of the public purse “to level the playing field and expand opportunities for the disadvantaged.”

“Using public procurement to address extreme disparities within large corporations,” the report adds, “would be a step towards the same general objective.”

And a step in that direction, as Peter Drucker told Wall Street Journal readers back in 1977, would do honor to the great achievement of American business in the middle of the 20th century: “the steady narrowing of the income gap between the ‘big boss’ and the ‘working man.’”

Sam Pizzigati co-edits Inequality.org. His latest books include The Case for a Maximum Wage and The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970. Twitter: @Too_Much_Online.