20 Feb 2020

ONE OF THE issues at the centre of the debate about inequality is the meteoric rise of executive pay. The ratio between the pay of American CEOs and ordinary workers rose from 20:1 in 1965 to 278:1 in 2018, according to the Economic Policy Institute, a think-tank. The London Business School (LBS) recently held a conference on what caused the rise, and whether it is justified.

At the conference, Dirk Jenter of the London School of Economics pointed out that the pay of chief executives in America was largely flat between the 1940s and the 1970s. It then rose spectacularly in the 1980s and 1990s before flattening out. What changed in the 1980s was that executive rewards began to be more focused on company performance and share options. The performance-related element rose from 16% of executive salaries in the 1970s to 26% in the 1980s and 47% in the 1990s.

This shift coincided with the great equity bull market of the 1980s. As Western economies recovered from the stagflationary problems of the 1970s, shares were repriced. The cyclically adjusted price-earnings ratio (a measure which compares share prices with a 10-year average of profits) rose from less than 9 at the start of 1980 to 44 in 1999. Little wonder that executives with share options made out like bandits. But was this down to their skill, or to the policies of...

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This content was originally published by The Economist: Business. Original publishers retain all rights. It appears here for a limited time before automated archiving. By The Economist: Business

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