The gap between CEO pay and the median employee wage has considerably widened at Russell 3000 companies, growing by an average of almost 4% annually from 150 to 1 in 2018, to 173 to 1 in 2022.

Between 2018 and 2022, seven of the 11 U.S. business sectors examined by Diligent Market Intelligence (DMI) saw CEO pay rise at a greater annualized rate than median employee pay.

The technology sector saw CEO pay rise by 13.6% in the period, compared to an 8.5% increase in median employee pay. The communication services and financial services sectors, where CEO pay rates have grown by 9.6% and 8.9%, respectively, saw median employee wages grow by 5.2%.

Just three sectors – healthcare, energy and real estate – have seen the gap between CEO and median employee pay shrink, when annualized over this period.

Below, DMI examines how pay ratios have ranked by sector since 2018. When calculating pay ratio averages, DMI opted to exclude any record where the ratio appeared as 0, in order to provide a more accurate picture:

Highest CEO pay ratio

Triple-digit pay gaps are often influenced by the number of frontline workers that are employed in these industries, Jillian DeMarco, MacKenzie Partners’ vice president of research, told DMI.

“Executive salaries are getting compared to an employment base that is made up of a significant amount of part-time and hourly workers, rather than salaried employees like in other sectors,” she explained, while noting that calculating CEO pay ratio based on mean employee salary rather than median, may be a fairer and more accurate method.

In 2022, the consumer defensive sector recorded the highest CEO pay ratio with an average of 456 to 1. The sector had the second lowest median employee wages for the past five years, with the figure growing by 5.5% year-on-year from $42,525 in 2018 to $52,588 in 2022. Average CEO pay has grown at a slightly slower rate year-on-year, at 4.9%. However, thanks to the higher starting point for CEO pay, the pay ratio has increased 73.4% from 263 to 1.

The consumer cyclical sector had the highest ratio from 2018 to 2021, before dropping to second at 349 to 1. The pay gap is attributable to the sector having the lowest median employee wage in each of the last five years, growing by just 4.7% year-on-year from $40,305 in 2018 to $48,387 in 2022. This is despite a year-on-year decline in average CEO pay of 4.9%.

The technology sector recorded the fifth highest average pay ratio in 2022 at 182 to 1. With average CEO pay at $13.6 million last year, the sector had the most generous compensation packages for its top executives while median employee pay of $114,020 was the fifth highest of all sectors examined. CEO pay has grown at a faster rate in the technology sector than in any other.

Lowest CEO pay ratios

At 71 to 1, the utilities sector recorded the lowest CEO pay ratio in 2022, in line with previous years. Average CEO pay for the period was $8.5 million with median employee pay of $115,900.

This is followed by the energy sector with a ratio of 85 to 1, down slightly on 2021 when it recorded a ratio of 86 to 1. Average CEO pay for the sector was recorded as $9.4 million in 2022, with median employee pay at $126,225. The median employee wage has grown in each of the last five years and is 9.7% higher than it was five years ago, while CEO pay is 6.3% higher than in 2018.

The real estate sector had the third lowest pay ratio at 80 to 1, having fallen by an average of 4.4% each year since 2018, when it stood at 97 to 1. In 2022, the average CEO pay in the sector was $7.9 million, 14.8% higher than that recorded in 2018, while the median employee wage stood at $136,176, 29.5% higher than 2018.

Narrowing the gap

In one industry move to address tensions between investors and companies over remuneration, the Fair Reward Framework (FRF), an investor-led initiative set to be launched in a pilot phase later this year, has identified that “excessive pay can undermine businesses’ social license to operate – very high pay levels relative to lower paid colleagues or workers across the wider economy risk feeding negative perceptions of businesses.”

However, the rate at which the gap can be narrowed has yet to be seen, as DeMarco explained. “I would like to think that companies would be willing to raise salaries to at least a living rate. Right now, we see a considerable amount of employees still earning a minimum wage and hovering around the poverty line. Nevertheless, we might just see CEO pay be cut to reduce the pay ratio, as this would be far more cost efficient for companies and would still satisfy investor demand for a reduction in the gap between employee and CEO pay. Raising employee pay would be the right thing to do, but honestly speaking, I do not see that happening in the near future.”

For insights into trends in pay, download Diligent Market Intelligence’s Executive Compensation in 2023 report, which offers definitive statistical analysis of this year’s executive compensation data.