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The Gap Between 36% and 1,460%

The strike has begun. The United Auto Workers union has walked off the job amid their dispute with the Big Three automakers. Among their demands is a 36% pay increase across the life of their new four-year contract. At first glance, that might seem like a big jump, but in context, it’s actually a modest request for their wages to match the growth in productivity UAW workers are producing for their companies. Moreover, this increase would mirror the raises Big Three executives have received themselves in recent years.

As we told you last week, profits at the Big Three automakers – Ford, General Motors, and Stellantis – have exploded. Between 2013 and 2022, the Big Three saw their profits rise 92% to a whopping total of $250 billion. But the thousands of hardworking employees that produced that financial windfall haven’t seen a dime of that wealth. In fact, auto workers’ average hourly wages have fallen 19% since the 2008 financial crisis, when they agreed to pay freezes and benefit cuts to save the industry.

So where’s the wealth gone if it hasn’t gone to workers? Look no further than the pocketbooks of Big Three executives and shareholders. Between 2013 and 2022, CEO pay at the Big Three increased 40%. In 2022, General Motors CEO Mary Barra made $29 million, which was 362 times what the median GM employee made; Ford CEO Jim Farley took home $21 million, or 281 times what the median Ford employee made; and Stellantis CEO Carlos Tavares made $24.8 million, or 365 times what the average Stellantis worker made. Profits were also spent on a $66 billion stock buyback campaign to benefit shareholders – most of whom, it’s safe to say, are not average GM, Ford, or Stellantis employees.

We’d love to say that exorbitant and obscene executive pay was a problem unique to the auto industry, but over the last four decades, it’s actually become endemic across many industries in the US. According to the Economic Policy Institute, between 1978 and 2021, CEOs at America’s largest 350 publicly owned firms saw their pay jump 1,460% while the typical worker’s pay grew just 18%. Also, the CEO-to-typical-worker compensation ratio grew from 20-to-1 in 1965 to 399-to-1 in 2021. In 2022, nine CEOs in America made more than $100 million. One of them was Live Nation Entertainment CEO Michael Rapino; he was paid $139 million, or 5,414 times as much as his company’s median employee ($25,673).

Executives try to justify their enormous paychecks by arguing that they are paid what they are “worth” under current market conditions. In a CNN interview last week, GM CEO Mary Barra defended her massive salary by claiming that “92% of it is based on the performance of the company.” But the facts simply don’t support this. For one thing, CEOs are paid handsomely even when the companies they oversee perform poorly. For example, in 2022, Peloton CEO Barry McCarthy was the fourth highest paid executive in America – despite the fact that his company hasn’t turned a profit since 2016. And oftentimes when companies do perform well and turn a profit, it is because of market forces outside of executives’ control, particularly the state of the economy.

It’s also worth noting that companies in other advanced countries which have experienced the same market forces as the US – e.g. globalization, technological advances, pandemic-induced supply chain bottlenecks, etc. – do not pay their executives as much as US companies do. If market forces were actually responsible for CEO pay, we would expect to see all executives at companies around the world being paid exorbitant sums, but that’s not the case.

Perhaps most importantly, suggesting that CEOs are paid what they’re “worth” assumes that their workers are too, which is not true in America today. That logic is insulting to the 52 million Americans making less than $15 an hour who are barely scraping by. Every American working 40 hours a week deserves to make a decent living, but many of them, through no fault of their own, struggle to put food on the table and afford basic necessities. We can, in part, point to CEO compensation as the reason why.

In the end, the reason why CEOs are paid so much has nothing to do with talent, worth, or market forces, but rather the power and policy shifts that have occurred in America over the last few decades.

Corporations in the mid-20th century used to operate under a model which assumed responsibility not just for shareholders but also for stakeholders like their employees, customers, and the communities they belonged to. Companies shared profits more widely with their workers, who were able to afford modest, comfortable lives for their families on just one salary. But that all began to change in the 1980s, when the likes of General Electric CEO Jack Welch and “corporate raiders” emerged and shifted corporate America’s focus entirely to shareholders’ short-term interests. Ultimately, this resulted in CEO pay becoming linked to the company’s stock market performance. Jobs were outsourced or automated, wages were slashed, unions were squashed, and communities were abandoned all with the singular aim of making as much profit as possible.

This way of doing business in America must come to an end. There is a lot that we can and should do to rein in obscene executive pay: guaranteeing workers a seat on corporate boards, taxing and/or withholding federal subsidies from companies with large CEO-to-worker pay ratios, and taxing stock buybacks more effectively are all good options. Until then, we need to at least ensure that workers are experiencing a degree of wage growth comparable to that of corporate executives. If executives at the Big Three experienced a 40% increase in pay over the last decade, it’s not too much for the UAW to ask for a 36% pay increase.

The Big Three automakers were once synonymous with stakeholder capitalism and the strong, vibrant middle class that America fostered. This is an inflection point. If the Big Three care about their workers – and their country – they should do the right thing and meet their workers’ demands. Doing so would help them regain the prestige they once enjoyed as the manufacturers of America’s middle class. If they opt instead to continue with business as usual, the strike will continue. The choice is theirs.