WASHINGTON – Pay for globe-trotting CEOs has soared to new heights, even as most workers remain grounded by paychecks that barely are budging.
While pay for the typical CEO of a company in the Standard & Poor’s 500 stock index surged 8.8 percent last year to $10.5 million, it rose a scant 1.3 percent for U.S. workers as a whole. That CEO now earns 257 times the national average, up from a multiple of 181 in 2009, according to an analysis by The Associated Press and Equilar, an executive-pay research firm.
Those figures help reveal a widening gap between the ultra-wealthy and ordinary workers worldwide. 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 CEOs enjoy lavish pay hikes and five reasons many people are stuck with stagnant incomes.
Why Ceos Get Huge Raises
- They’re 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 CEOs this way is that it aligns the interests of senior management with those of shareholders, which would seem beneficial for a company.
The average value of stock awarded to CEOs surged 17 percent last year to $4.5 million, the largest increase ever recorded by the AP. Remember, too: Long-term gains on stocks are taxed at lower rates than ordinary pay is.
- Peer pressure – Robert Solow, a Nobel Prize-winning economist, recently said that CEOs live in “Lake Wobegon,” that fabled town created by radio show host Garrison Keillor where, “all the children are above average.” Solow didn’t mean it as a compliment.
Corporate boards often set CEO pay based on what the leaders of other companies make. No board wants an “average” CEO. So boards tend to want to pay their own CEO more than rival CEOs who are chosen for benchmarking compensation packages.
- The superstar effect – Companies often portray their CEOs as the business equivalents of LeBron James or Peyton Manning, athletes who command (and deserve) enormous pay for their performance and ability to draw crowds.
- Friendly boards of directors – Some board members defer to a CEO’s judgment on what his or her own compensation should be. There’s a good reason: Many boards are composed of current and former CEOs at other companies. In some cases, board members also are essentially hand-picked or at least vetted by the CEO. Not surprisingly, the boards’ compensation committees offer generous bonuses.
- Stricter scrutiny – Even companies with vigilant boards and an emphasis on objectively assessing CEO performance might shower their chief executives with money. When a CEO faces more scrutiny and a greater chance of dismissal, the 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 Many Workers Don’t Get Raises
- Blame the robots – Millions of factory workers have lost their spots on assembly lines 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 Massachusetts Institute of Technology. As these middle-income positions vanish, workers struggle to find new occupations that pay as well. 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.
- High unemployment – The aftermath of the Great Recession left a glut of available workers. Businesses face less pressure to give meaningful raises when a ready supply of job seekers is available. They’re less fearful that their best employees will defect to another employer.
The current 6.3 percent unemployment rate, down from 10 percent in October 2009, isn’t so low that employers will spend more to hire and keep workers. Wages grew in the late 1990s when unemployment dipped to 4 percent.
- Globalization – Companies can cap wages by offshoring jobs to poorer countries, where workers on average earn less than the poorest Americans. Consider China. A typical Chinese factory employee made $1.74 an hour in 2009, according to the U.S. Bureau of Labor Statistics – roughly a tenth of what their U.S. counterpart made.
- Weaker unions – Organized labor no longer commands the heft it once did. More than 20 percent of U.S. workers were unionized in 1983, compared with 11.3 percent last year, according to the U.S. Bureau of Labor Statistics. Fewer workers can collectively negotiate for raises.
- Low inflation – For the past five years, the 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.