Millionaire CEO salaries exacerbate inequality, study finds

The demand for good social and governance practices has led companies to rethink old business habits, but one aspect still seems unshakable in the corporate environment: the payment of millionaire bonuses to top leadership.

Recently, the disclosure of Nubank’s compensation plan generated discussion on social media. The agreement provides for the payment of more than BRL 800 million to the bank’s board in 2022, of which BRL 678.9 million (84%) will go to CEO David Vélez alone.

Although the value is higher than that observed among large Brazilian companies, it is not an exception. Last year, Itaú Unibanco paid BRL 444 million to its managers, while Bradesco distributed around BRL 880 million to members of the executive board and the board of directors and the fiscal council.

Normalized by the corporate world, the practice contrasts with the social responsibility posture that companies want to adopt amid the current ESG (environmental, social and governance) wave, as it helps to worsen the pay gap.

A study by the EPI (Economic Policy Institute) research center showed that CEO compensation has skyrocketed by 1,322% since 1978, while the average worker’s salary has risen by just 18%. According to the survey, in 2020, executive directors received 351 times more than the average worker.

“The exorbitant pay of CEOs is a major contributor to the increase in inequality that we could safely eliminate,” the authors state in the study. According to them, the top leadership is earning more because they are able to define how much they receive and because most of the bonuses are linked to shares.

“This escalation in CEO pay, and executive pay in general, has fueled income growth for the richest 1% and 0.1%, leaving less of economic growth for ordinary workers and widening the gap between those who earn a lot and the poorest 90%” they add.

The work mainly considered the reality of the United States, where the bonuses paid to executives are even higher than in Brazil.

In 2021 alone, the CEOs of the 100 largest American companies received together around R$11.2 billion. At the top of the list is Patrick Gelsinger, an executive at Intel, who alone pocketed more than R$ 890 million in the year, according to data from Equilar consultancy.

For Gideon Locks, a researcher at the CES (Centre d’Économie de la Sorbonne) in Paris, the remuneration of top corporate leadership has reached stratospheric levels, which is not justified by any other mechanism or factor predicted by economic theory.

“It’s just like that because there is no limit. There is a competition between companies to see who pays the biggest bonus and manages to get the CEO who is more starred”, he says.

In his view, the practice was socially naturalized, even though there is no evidence that it can bring any kind of economic efficiency.

“If we take data from publicly traded companies in rich countries, [vemos que] these exorbitant payments are not really financial compensation, because they do not translate into better business performance. They don’t create more jobs or more value by paying BRL 15 million instead of BRL 2 million for a CEO.”

Locks argues that while social inequality is a complex and multifactorial issue, there is a connection between superbonuses and social inequality.

However, he is skeptical that the solution will come from the business community itself, from shareholders or from a law. The best way, he says, is through taxation, ensuring that those who earn more pay more taxes.

What is the logic behind millionaire bonuses?

Most bonus payments are not usually made in cash, but in company shares (stock options). Furthermore, in the case of long-term incentives, it is not uncommon for compensation to be linked to performance targets.

The instrument is widely used by high-growth companies as it works as an incentive for top leadership. If the company’s stock appreciates, the CEO earns more.

In the case of Nubank, for example, more than 85% of the compensation forecast in shares of the board depends on the achievement of goals.

Marco Santana, head of compensation and benefits at consultancy Korn Ferry, says that the disclosure of millionaire figures tends to generate confusion about what is actually being pocketed by the executive.

According to him, it is important to put bonuses in perspective, as these payments usually represent 1% or 2% of the company’s market value.

“The value sometimes shocks, but when we think it’s a function of a result to be achieved, [que vai ser] paid in shares, for five years, and that the company is worth R$ 80 billion, R$ 100 billion… To me it seems very reasonable.”

Still, Santana says it’s necessary to consider the discrepancy between executive salaries and the rest of the company — especially in a country like Brazil.

“The concern about this gap [lacuna] of remuneration between the highest paid and the lowest wages is a fundamental point. We need to reduce this gap”, he says.

This is also the opinion of Carlo Pereira, executive director of the Brazil Network of the Global Compact, a UN initiative to engage the private sector in the adoption of sustainable practices.

According to him, the Pact did not enter into the discussion on the restriction of millionaire bonuses, but has proposals to reduce the gap between the maximum remuneration of a company and the average and minimum remuneration of employees.

“Without a doubt, one thing that bothers us is this difference between the top leadership and the average employee”, he says. “Closing this gap is an important way to reduce inequality — and [para conseguir fazer] it has to have a goal”, he adds.

How to reduce the pay gap?

Currently, the Global Compact has sought to engage the corporate environment in a movement in favor of a living wage.

Unlike the minimum wage, which seeks to guarantee subsistence, the decent wage is based on the concept of a decent and healthy life, taking into account aspects such as access to leisure, culture and other important items.

One of the parameters is usually the Dieese (Inter-union Department of Statistics and Socioeconomic Studies), which calculates the ideal amount to cover all the expenses of a worker and his family in Brazil. According to calculations from March 2022, the ideal minimum wage should be BRL 6,394.76 — five times higher than the current BRL 1,212.00.

“A direct action [que uma empresa pode adotar] to fight inequality is to pay a living wage. With this salary, people can have a better life not only for themselves, but for their entire family”, says Pereira.

In his view, this is a very incipient discussion in Brazil that needs to mature. For the time being, the Pact intends to train leaders and awaken companies to the importance of the subject.

“Let’s start with baby steps [pequenos passos]despite the urgency of the issue, to see how we will be able to advance effectively”, he says.