If CEOs Took a 50% Pay Cut, How Much Would Workers Earn Instead?

When you see headlines about CEOs of large companies earning tens of millions of dollars per year, while at the same time these companies conduct layoffs or clash with employee demands for salary increases, you’re probably not alone in thinking that executives could take a pay cut.

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The reality, however, is that the direct effects of cutting CEO pay are typically small, although the psychological effects might be higher.

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Median CEO Compensation vs. Median Employee Compensation

Since 2017, as part of the Dodd-Frank Act, publicly traded companies have had to publicly disclose the pay ratio between the CEO and median employee.

In 2024, the median CEO pay ratio for companies in the S&P 500 was 192-to-1. That marked an increase from 186-to-1 in 2023, according to research from Equilar and the Associated Press (AP).

Most of this gap comes from the huge stock awards to CEOs at large public companies, with these accounting for 71.6% of median pay package of S&P 500 company CEOs in 2024, per Equilar and the AP. Still, those awards cut into a company’s net income, and the same amount could theoretically be distributed in other ways, such as granting more stock to all workers to raise their total compensation. Or shareholders might be more accepting of higher compensation expenses if there are fewer stock grants diluting their ownership stakes.

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What If CEO Compensation Were Cut in Half?

So if the median CEO had their total compensation cut in half, that would essentially free up $8.55 million to redistribute in some way to employees. That may sound like a lot, but consider S&P 500 companies employ roughly 28.5 million people, according to a Chart Kid Matt analysis. For the sake of this hypothetical, let’s divide that up evenly, which would give us 57,000.

So dividing $8.55 million by 57,000 results in each employee getting just $150 more. 

That said, the smaller the company, the greater the effect could be, although small companies often have lower CEO pay.

Hypothetically, though, suppose there’s a small business where the CEO earns $1 million per year and pays 20 employees $50,000 each. If the CEO cut their pay in half, distributing $500,000 among those 20 employees means each would get an extra $25,000, boosting their pay by 50%.

Still, a small company like that may be unlikely to have large enough margins to support such high CEO pay.

Pros and Cons of High CEO Pay Ratios

While cutting a CEO’s pay at most large public companies may not make much of a direct difference in the average worker’s pay, there are still very important reasons to carefully consider this ratio.

On the plus side, a high ratio might reflect positive changes at a company, explained Lisa A. Cummings, an attorney at Cummings & Cummings Law, who works with companies on the design and compliance of their compensation programs.

For example, high CEO pay could be due to a recent recruitment that could help turn around the company’s performance.

“Usually, newly hired CEOs must be ‘bought out’ of their previous equity at a prior company to entice the CEO to join, and that upfront compensation is frontloaded into the CEO’s pay. If the CEO performs, they should be able to increase the profitability of the company and ensure the company’s future, benefiting all employees for future employment and compensation increase opportunities,” Cummings said.

Also, since the bulk of CEO pay tends to be tied up in variable elements, such as bonuses and stock compensation, that provides some alignment toward meeting corporate objectives, which could provide more opportunities for employees to receive salary increases if the company does well, Cummings explained.

However, high CEO-to-median-employee pay ratios can also be damaging to companies in several ways. For one, it can hurt employee morale, per Cummings.

“With the transparency of pay, employees typically will discuss the ratio,” she said. “The employees may hold two different sentiments: One is the obvious of ‘How come the CEO gets paid so much and I don’t receive as large a percentage annual increase as they do?’ The less obvious, but just as real sentiment, is ‘Why don’t I earn at least as much as the median employee salary?'”

Lower employee morale “can in turn result in lower employee productivity and increased employee turnover, as well as increased unionization activity,” according to Cummings.

Ultimately, comparing a CEO’s pay to the average worker’s salary doesn’t always tell you much in isolation, and cutting a CEO’s pay may have minimal impact on boosting salaries. However, when comparing pay ratios among similar companies, that could help uncover issues and highlight important business insights.

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