Who sets executive pay, and how

In 2025 the average S&P 500 chief executive was paid $22.8 million. That's excluding Elon Musk, whose $158 billion Tesla package was larger than every other S&P 500 CEO's pay combined. Include him and the average is $340 million, which is a meaningless number, so most people leave him out.

The AFL-CIO, which compiles these figures every year from company filings, puts the ratio of CEO pay to the median US worker at 312 to 1 for 2025. It was 285 to 1 the year before. In 1965 it was about 20 to 1.

None of this is set by the CEO. Here is who does set it.

The compensation committee

The board of directors has a compensation committee, usually three or four directors, all of whom must be independent under stock exchange rules. That committee decides the CEO's pay and the full board approves it.

The committee almost always hires a compensation consultant. The consultant's main tool is a peer group: fifteen or twenty companies of similar size, and what they pay their CEOs. The committee then picks a target, and the target is nearly always at or above the median of the peer group. Nobody wants to tell their CEO they're paid below average.

If every company targets the 50th or 75th percentile of its peers, the median moves up every year, which is what has happened. This is called ratcheting and it's the single biggest structural reason executive pay rose faster than any other pay category for four decades.

What the pay is made of

Salary is a small piece: at a large company the CEO's base salary is often $1 million to $1.5 million, around 10 percent of the total. Federal tax law stopped letting companies deduct executive salary above $1 million in 1993, so companies moved the money elsewhere.

Most of the rest is stock: restricted shares, options and performance shares that pay out if the company hits targets. The idea is to tie the CEO's wealth to the share price so they'll act like a shareholder, which works, and which also means the CEO's pay rises with the market whether or not they did anything.

The remainder is an annual cash bonus, tied to metrics the committee picks. Revenue, profit, sometimes safety or staffing numbers. The committee sets the targets and decides afterward whether they were met.

What shareholders get to say

Since 2011, public companies have to hold a shareholder vote on executive pay at least every three years. It's called say-on-pay, the vote is advisory and the board can ignore it.

In practice the vote passes at about 97 percent of companies, and average support runs around 90 percent. The large index funds that hold most of the shares vote in favor almost by default. When a vote does fail, the company usually tweaks the plan and the next one passes.

Since 2018, companies also have to publish the ratio of their CEO's pay to their median employee's pay. That's where the numbers above come from. The disclosure hasn't changed the ratio.

What employees get to say

Employees have no formal role here. They don't vote on executive pay, don't sit on the compensation committee and don't get to see the consultant's report. Their pay is set by management, within a budget approved by the same board. The two processes are separate by design.

Where it works differently

A worker cooperative sets pay differently because the people voting are the people being paid. Mondragon in Spain caps the top salary at roughly six to nine times the lowest, depending on the cooperative. CPL Concordia in Italy has 1,800 employees and a pay scale its members vote on. Our post on what stops worker-owners from voting themselves a raise gets into how those caps hold.

The point of laying this out is not that any individual director is doing something wrong. The committee, the consultant, the peer group and the advisory vote are all doing exactly what they're built to do, and the outcome is what that design produces.