WASHINGTON—CEO pay has soared to new heights, even as most workers remain grounded by paychecks that have barely budged.
While pay for the typical CEO of a company in the Standard & Poor’s 500 stock index surged nine per cent last year to $10.46 million, pay for U.S. workers rose a scant 1.3 per cent.
Here are five reasons why CEOs are enjoying lavish pay increases and five reasons wages for the rank-and file-have stagnated.
Why CEOs get huge raises:
1. 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. CEOs are compensated because it aligns the interests of senior management with those of shareholders.
Yet accounting scandals of the early 2000s showed this method allows some executives to game the system.
Still, the bonanza continues. The average value of stock awarded to CEOs surged 17 per cent last year to $4.5 million, the largest increase ever recorded by the AP. Long-term gains on stocks are taxed at lower rates than ordinary pay.
2. Peer pressure.
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 rivals.
3. 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. As corporate giants compete around the world, the drive to procure corporate superstars has helped inflate CEO pay.
4. 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. And in some cases, board members are essentially hand-picked or at least vetted by the CEO. Not surprisingly, the boards’ compensation committees offer generous bonuses.
5. Stricter scrutiny.
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 the rest of us aren’t getting raises:
Millions of factory workers have lost their spots on assembly lines to machines. Offices need fewer administrators in the digital era.
As these middle-income positions vanish, workers struggle to find new jobs that pay as much. Many must settle for low-paying retail and food service jobs.
2. 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.
Companies wages by offshoring jobs to poorer countries, where workers earn less than the poorest Americans. Some analysts say this decades-long trend may have peaked. But many economists say the need for the United States to compete with a vast supply of cheap labour worldwide continues to exert a depressive effect on U.S. workers’ pay.
4. Weaker unions.
Organized labour no longer commands the heft it once did. More than 20 per cent of U.S. workers were unionized in 1983, compared with 11.3 per cent last year, according to the Bureau of Labor Statistics.
5. Low inflation.
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.