How High CEO Salaries Make you Poorer

Few admit it but salary is a zero sum game.

When discussing things like a livable wage, decent salary or whatever you may call it, you always see people who state things like:

I don’t care that somebody else is rich, it doesn’t affect me. Or I don’t care if the CEO makes a lot of money, it doesn’t affect my salary.

People like to pretend that what you make and what I make are completely independent. The idea is that if somebody becomes rich, then that money is created out of thin air and don’t affect anybody else.

In reality however salary is in fact a zero sum game. If somebody gets a higher salary, it is at the expense of everybody else. Let me try to explain why. A society is producing a certain amount of goods and services. If you increase somebody’s salary, that does not automatically case the number of goods and services to be increased. Instead you suddenly have more money chasing the same number of goods and services.

This may be easier to explain with a sort of Robinson Crusoe Islands only growing bananas. Say the island produce a total of 12 bananas. Crusoe makes 6 dollars and Friday makes 6 dollars, and they each buy a banana for 1 dollar each. Now imagine Crusoe becomes CEO and gets a raise and now makes 18 dollars. There are now 6 + 18 = 24 dollars in total trying to purchase 12 bananas. That means 2 dollars will be required to buy a banana instead of the previous 1 dollar.

What we essentially got is inflation. The supply of money increased without increase in production. In this new scenario, Friday can only buy 3 bananas, while earlier he bought 6. Crusoe in contrast can now buy 9 bananas.

As you can see while Friday’s salary in dollar terms was not reduced, his purchasing power was reduced by the massive salary increase that Crusoe enjoyed.

This reality isn’t restricted to some imaginary Robinson Crusoe island. In the US which is perhaps the most stark example of this development CEO compensation has increased 940% since 1978, while worker compensation has risen only 12%.

This is even faster than the stock market which grew only 706.7% in the same time period (1978–2018). The economy as a whole has not likely grown much more than 200–300% in that same time period (1.025⁴⁰ = 2.68), assuming around 2-3% annual growth rate.

That means CEOs are seeing their salaries increased much faster, than the economy is able to increase its output of goods and services.

Think about this. If you double the salaries of management at a car company, you are not going to see that car company double the efficiency of its car manufacturing. The workers are not going to finish making cars in half the time, they are not going to use half as much steel or buy it at half the price.

One of the excuses we frequently see for why CEO salaries are getting to high is because CEOs are paid in stock options and so their compensation is really just a reflection of their ability to grow the value of the company stock.

Except this is just the flip side of the same problem. The value of the stock is detached from the rest of the economy. The stock market grows considerably faster than the actual economy. People can argue all they want about stocks representing future potential, but this future potential is grossly exaggerated.

This kind of claims have been made for over 40 years now. Where is this future we have been promised. Economic growth has slowed all over the west. It was higher in the 1970s and earlier. We are dealing with slower economic growth while the stock market is going through the roof. The current COVID19 crisis is perhaps a better exemplification of this problem than anything else. Stocks have rallied to new heights while the real economy has come crashing down.

It does not take a genius to see how the system is rigged. CEOs can excuse their inflated salaries with the stock market, but the two are not detached. CEOs actively seek to inflate the stock market to reward themselves. Looking at the statistics we can see that the stock market value is detached from the actual ability of companies to generate wealth.

What CEOs are in the business of doing is really to inflate bubbles. That is modern capitalism. It is about inflating asset bubbles. You cash in while the bubbles are inflated. When the bubble burst as it did back in 2008, you get the tax payers to bail you out. Hence you never really take the fall for artificially inflating the value of your assets.

What you get is a merry go round, where CEOs, Bankers, highly paid managers and greedy politicians all join in on a scheme that pumps up the economy artificially and that wealth is spread out to everybody else in this close circle. It is all being excused with “I made this company stock grow so much.”

In reality it is just a complex version of what happened on our Robinson Crusoe Island. Money was created out of thin air and given to Crusoe, but the Banana plantation wasn’t producing anything more. Friday got robbed, but didn’t realize it because his salary hadn’t actually changed.

It is important to realize that “making money” isn’t the same as actually making goods and services. I can make a lot of money running a Casino, speculating on the stock exchange or buying and selling property. However in this process I am not actually increasing the total goods and services in society. I am not making society as a whole better off.

Instead my “money making” is really just the same “money making” that Crusoe engaged in. I allocated a bunch of extra dollars to myself, at the expense of everybody else. But because a real economy is much larger than a Robinson Crusoe island, it is hard for the workers in the rest of the economy to notice that they are getting screwed over.

Thus before praising some rich guy for making money, ask yourself whether that money was made from increasing the total amount of goods or services produced in society or whether he really just shifted around who was making the money?

If I buy a farm and produce no more potatoes on it than the previous owner, then I haven’t really added to the economy. The profits from economic activity has simply accrued to somebody else. Thus the key contribution somebody can make in an economy is by increasing productivity. That is by requiring less labour and resources to make the same kind of product.

Elon Musk is an example of a guy doing stuff like that. SpaceX rockets e.g. are much cheaper to build than the competition. This is a result of less labour and materials required to build them. In addition they are reusing their rockets so they save man hours and resources by not having to rebuild the rocket boosters.

Tesla electric cars are a similar example. They are considerably cheaper and more capable than electric cars used to be. As a society these efforts are giving us more products and services we want for less effort. That is real economic growth.

Contrast this with Donald Trump. Has his economic activity really led to any improvements. He ran Casinos, which don’t add anything valuable to society. He has been building and selling luxury apartments and made real-estate deals. But has any of his buildings really been built in a more efficient manner than anybody else could have? Did he come up with any method to reduce the amount of man power or concrete to produce the same building mass?

Geek dad, living in Oslo, Norway with passion for UX, Julia programming, science, teaching, reading and writing.

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