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 cause 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.