Pay for globe-trotting chief executives has soared to new heights, even as most workers remain grounded by paychecks that are barely budging.
While pay for the typical chief executive of a company in the Standard & Poor’s (S&P) 500 stock index surged 8.8 percent last year to US$10.5 million, it rose a scant 1.3 percent for US workers as a whole.
That chief executive now earns 257 times the national average, up from a multiple of 181 in 2009, according to an analysis by The Associated Press (AP) and Equilar, a California-based firm that tracks the total compensation packages of top-level executives.
Those figures help detail a widening gap between the ultra-wealthy and ordinary workers around the world. That gap has fed concerns about economic security — everywhere from large cities where rents are high to small towns where jobs are scarce.
Here are five reasons why chief executives are receiving lavish pay increases and five reasons most people are stuck with stagnant incomes.
WHY CEOS GET MASSIVE RAISES
They Are paid heavily
in stock
Unlike most workers, chief executives receive much of their compensation in the form of company stock — a lot of it. The theory behind compensating chief executives this way is that it aligns the interests of senior management with those of the shareholders, which would seem beneficial for a company.
Yet accounting scandals of the early 2000s showed that some executives gamed the system, ultimately at shareholders’ expense. Executives at firms such as Tyco and Enron tinkered with the books to boost corporate incomes, share prices and the fortunes of insiders and senior managers.
Still, the bonanza continues.
The average value of stock awarded to chief executives surged 17 percent last year to US$4.5 million, the largest increase ever recorded by AP. Remember, too: Long-term gains on stocks are taxed at lower rates than ordinary pay.
The S&P 500 jumped 30 percent last year, compounding the size of the chief executives’ paydays. Consider Leslie Moonves of CBS, whose stock climbed at twice the rate of the overall stock market. Moonves collected US$65.6 million.
The stock rally has been fueled in part by historically low interest rates engineered by the US Federal Reserve. Those rates led many investors to shift money out of low-yielding bonds and into stocks.
PEER PRESSURE
Robert Solow, a Nobel Prize-winning economist, recently observed that chief executives live in “Lake Wobegon,” that fabled town created by radio show host Garrison Keillor where, it is said, “all the children are above average.”
Solow did not mean it as a compliment.
Corporate boards often set chief executive pay based on what the leaders of other companies make. No board wants an “average” chief executive. So boards tend to want to pay their own chief executive more than rival chief executives, who are chosen for benchmarking compensation packages.
This will “naturally create an upward bias” in pay, Charles Elson and Craig Ferrere of the University of Delaware concluded in a 2012 paper.
“[T]he compounded effect has been to create a significant disparity between the pay of executives and what is appropriate to the companies they run,” they said.
THE SUPERSTAR EFFECT
Companies often portray their chief executives as the business equivalents of LeBron James or Peyton Manning — athletes who command enormous pay for their performance and ability to draw crowds.
The era of digital communication and private jets has given leading athletes, entertainers and business people the global reach to generate outsized profits. The late University of Chicago economist Sherwin Rosen theorized that this phenomenon would concentrate more income with the top players. As corporate giants compete around the world, the drive to procure corporate superstars has helped inflate chief executive pay.
FRIENDLY BOARDS OF DIRECTORS
Some board members defer to a chief executive’s judgement on what his or her own compensation should be. There is a good reason: Many boards are composed of current and former chief executives at other companies.
In some cases, board members are essentially hand-picked or at least vetted by the chief executive. Not surprisingly, the boards’ compensation committees offer generous bonuses.
STRICTER SCRUTINY
Even companies with vigilant boards and an emphasis on objectively assessing chief executive performance might shower their chief executive with money.
When a chief executive faces more scrutiny and a greater chance of dismissal, companies often raise pay to compensate for the risk of job loss, according to a 2005 article by Benjamin Hermalin, a professor at the University of California, Berkeley.
WHY WORKERS DO NOT
BLAME THE ROBOTS
Millions of factory workers have lost their assembly-line jobs to machines. Offices need fewer secretaries and bookkeepers in the digital era.
Robots and computers are displacing jobs that involve routine tasks, according to research by David Autor, an economist at the Massachusetts Institute of Technology. As these middle-income positions vanish, workers struggle to find new jobs that pay as much. Some must settle for low-paying retail and food-service jobs.
College tends to substantially improve people’s earnings power compared with workers who have completed only high school, but even workers who have attended college have been hurt by the loss of middle-income jobs.
Nearly 45 percent of US workers who earned less than US$10.10 an hour last year had either attended college or graduated, according to an analysis by John Schmitt, a senior economist at the Center for Economic and Policy Research.
HIGH UNEMPLOYMENT
The Great Recession left a glut of available workers. Businesses face less pressure to give meaningful raises when a ready supply of jobseekers is available; they are less fearful that their best employees will leave.
The current US unemployment rate of 6.3 percent, down from 10 percent in October 2009, is not so low that employers will spend more money to hire and keep workers. Wages grew in the late 1990s when unemployment dipped to 4 percent, a level that made high-quality workers scarce and compelled businesses to raise pay.
GLOBALIZATION
Companies can cap wages by offshoring jobs to poorer countries, where workers on average earn less than the poorest US citizens. Consider China. A typical Chinese factory employee made US$1.74 an hour in 2009, according to the US Bureau of Labor Statistics — roughly a 10th of what their US counterpart made.
Some analysts say this decades-long trend may have peaked, but many economists say the need for the US to compete with a vast supply of cheap labor worldwide continues to exert a depressive effect on US workers’ pay.
WEAKER UNIONS
Organized labor no longer commands the sway it once did. More than 20 percent of US workers were unionized in 1983, compared with 11.3 percent last year, according to the US Bureau of Labor Statistics. That has drastically reduced the unions’ sphere of influence. Result: Fewer workers can collectively negotiate for raises.
LOW INFLATION
For the past five years, the US government’s standard inflation gauge, the consumer price index, has averaged an ultra-low 1.6 percent. When inflation is high, employees tend to factor it into requested pay raises, but when inflation is as low as it has been, it almost disappears as a factor in pay negotiations. Workers typically settle for less than if inflation were higher.
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