The CEO got a huge raise. You didn't. Here's why.

Last year typical CEO for company in the Standard & Poor's 500 stock index got 9 percent raise, U.S. workers as a whole got 1.3 percent
Associated Press
May 28, 2014

Pay for globe-trotting CEOs has soared to new heights, even as most workers remain grounded by paychecks that are barely budging.

While pay for the typical CEO of a company in the Standard & Poor's 500 stock index surged 9 percent last year to $10.46 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.

Those figures help reveal 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 CEOs are enjoying lavish pay increases and five reasons many people are stuck with stagnant incomes.

WHY CEOs ARE GETTING 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. 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.

Yet accounting scandals of the early 2000s showed that some executives gamed the system, ultimately at shareholder 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 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.

The S&P 500 jumped 30 percent last year, compounding the size of the CEOs' paydays. Consider Leslie Moonves of CBS, whose stock climbed at twice the rate of the overall stock market. Moonves collected $65.6 million.

The stock rally has been fueled in part by historically low interest rates engineered by the Federal Reserve. Those rates led many investors to shift money out of low-yielding bonds and into stocks.

2. Peer pressure.

Robert Solow, a Nobel Prize-winning economist, recently observed that CEOs 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 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.

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."

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.

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 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.

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 OF US AREN'T GETTING A RAISE

1. 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 are struggling to find new occupations 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 U.S. workers who earned less than $10.10 an hour last year had either attended college or had graduated, according to an analysis by John Schmitt, a senior economist at the liberal Center for Economic and Policy Research.

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.

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, a level that made high-quality workers scarce and compelled businesses to raise pay.

3. 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 Bureau of Labor Statistics — roughly a tenth of what their U.S. counterpart made.

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 labor worldwide continues to exert a depressive effect on U.S. workers' pay.

4. 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 Bureau of Labor Statistics. That has drastically reduced the unions' sphere of influence. Result: Fewer workers can collectively negotiate for raises.

5. 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. Workers typically settle for less than if inflation were higher.

 

Comments

OMG.LOL.WT_

# 1 reason: They are GREEDY #%^%@&**%#s

Justme...

Truth is, everyone is a GREEDY #%^%@&**%#.

Fromthe419

re: 5. Low inflation.

What a crock, everyone knows the CPI has been watered down and excludes food and energy. Anyone buy steaks this past weekend for Memorial Day? Real inflation is through the roof and the FED uses bogus numbers.

Contango

Re: "1. They're paid heavily in stock."

The Federal Reserve with it's ZIRP and QE policies have helped to make the financial sector the current winner.

Because of world-wide central bank policies (BOJ, ECB, Fed, et. al.), if you got money, you make money.

Labor is battling world-wide deflationary pressure.

The S&P closed at another record high yesterday!

It was up 187% from it's market low in Mar. '09.

If you ain't in stocks, you're falling behind.

The best time to buy? Last yr.

OMG.LOL.WT_

"The best time to buy? Last yr." Best time to quarterback, Monday morning.

samiam

Can't understand why someone gets a huge bonus for doing the job (and often not very well if the company has a loss or other big problems, i.e. recalls, etc.) he/she is getting paid hundreds of thousands or millions of dollars to do. Do you or I get a bonus for doing our jobs well? If we're lucky, we get to keep our job or if the company is profitable, we might get some profit sharing.

grumpy

Few large companies had a loss. read about the afroementioned rise in stock prices. Up i87% since the low in 09. As was mentioned many CEO's get stock for much of their pay and bonuses. All of this was either in the article or in the comments after. Are you now going to say these things are false? Or did you not read the article and prior comments? CEO's generally have little to do with recalls and engineering problems. Now if they are a continuing problem as in GM well GM has had management problems for decades.
, and should have been allowed to go through bancruptcy court without the gov't stepping in. Maybe that would have fixed them instead of putting a band-aide on the boo-boo. They have more cars recalled this year than they have built in the last couple years. They may not be owned by the gov't anymore... but the way they do business sure makes it seems like they are.

downthemiddle

Here's how it works...

Those at the top worked every angle, fought, clawed, stepped on people, strategized, did everything possible including work very hard to position themselves in line for promotions.

It's not a perfect system... personalities and corporate politics have a lot to do with it. Ability and effectiveness count also but it's a lot of "who you know". It takes a lot of schmoozing...

To those who complain and want that CEO job.... refer to paragraph 1.. start with a at least a Master's in biz or finance.. try to get hired and start rubbing elbows. It doesn't hurt to not be a white male.

It's not a perfect system.

blackjack82

I always wondered why people care how much a highly educated and talented CEO makes when they continue to support the outragous NBA, NFL and MLB contracts to play a game !!! You support it by buying tickets, watching TV and buying stuff. At least the CEO has to perform and the stock must go up or he just gets his salary, about the same as a rookie contract at best. If the stock goes down, he gets the boot.

downthemiddle

Every word true...
----------
Thanks for making the comparison. Sports are not about the ball... they're about money.

samiam

The CEOs often still get huge bonuses whether the stock goes up or not. Even when they get the boot, they still get huge amounts to buy out their contracts. Just look at the local picture re city managers, etc.

downthemiddle

No excuse for it in government...

...Corporations are a different story. If the company loses money there are no dividends... If the CEO still gets a bonus, the stockholders fire him.

Licorice Schtick

Um...sort of. Boards are often packed with the CEO's cronies, and stockholder suits are difficult. It's a corrupt system that favors insiders and skewers the ordinary stockholder.

Contango

Re: "skewers the ordinary stockholder,"

Mishegas.

Yea, let's put in some schmuck who can't tie his/her own shoelaces together so they can run the co. into bankruptcy.

If "it's a corrupt system," then why do public & private pension funds, money mgrs., institutional investors, mutual funds, et. al. own shares?

Use Google, Apple, Microsoft, Amazon, et. al.? Their CEOs make billions!

rottnrog

Since they make billions they should work for nothing !!!!

;o)

Contango

Re: "skewers the ordinary stockholder."

With div'ds, the Standard & Poor's 500 stock index was up 32% in 2013.

If a retail investor owned it, where's the 'skewering'?

rottnrog

Americans have been brainwashed into thinking that CEO's deserve big bucks to the point that now right wingers even think they deserve big tax breaks !!

grumpy

Yes the last couple of decades or so of articles like this show just how accurate your logic is. When was the last bunch of articles saying that CEO's are underpaid, or even decent human beings? Thanks for being an example.

grumpy

Yes the last couple of decades or so of articles like this show just how accurate your logic is. When was the last bunch of articles saying that CEO's are underpaid, or even decent human beings? Thanks for being an example.

Unassumer

The gap between the rich and the poor is getting larger by the year and something needs to be done about that or we're going to have more problems with the economy and maybe some rioting in the streets. Have you seen the house where the CEO of Dollar General lives? Google it. It's appalling that companies like this are paying their workers that essentially run their business so little while the CEO lives like a king. It's not just Walmart folks.

downthemiddle

check out the NBA, NFL, and MLB mansions...

If you don't shop at Dollar General, the CEO has NONE of your money..

If you support pro sports teams and go to games, buy t shirts etc...

follow the money.

downthemiddle

@blackjack.... above...

I agree a million percent....

Anyone stupid enough to overpay for a t shirt with somebody else's name on it deserves to remain the irrelevant sucker that he is.

They only sell the shirts because some people are stupid enough to buy them... at about 5 times the price for a plain identical shirt...

Blind allegiance is a powerful thing....

Chirp

You know why? IT'S ENTERTAINMENT! They deserve every last dollar because people are willing to pay to see it! Are people willing to pay CEOs to watch them? No.

And don't downplay the amount of work and practice that goes into being a professional athlete. The argument that professional athletes are overpaid is absurdly RIDICULOUS.

downthemiddle

Nah....

Some people are better at throwing a ball than others...

Some people are better at making business decisions than others.

Just boycott the products of companies that overpay the CEO.. then you'll have extra money with which to buy sports souvenirs.

Nemesis

"And don't downplay the amount of work and practice that goes into being a professional athlete. The argument that professional athletes are overpaid is absurdly RIDICULOUS."
One problem with that. I can hand Cleveland a Super Bowl win, World Series win, and an NBA championship in one year, for less than the average starting MLB pitcher's salary. Give me a dozen each chimps, orangutans, and lowland gorillas, and a team of animal trainers. Make ice skates to fit them and I'll throw in a Stanley Cup at no extra charge. It's all a question of strength, speed, stamina, and hand-eye coordination, things at which humans, relative to other species, suck.

Not only do we pay athletes amounts we would begrudge a surgeon with 12 years of extra education, we also excuse their behavior that we wouldn't tolerate from a ten year old, all because they can do something with a ball or puck that a trained animal could do better. Heck, there's a non-negligible portion of the population that seems to think being a good football/basketball player should be an affirmative defense to a rape charge.

What did California Chrome get for his athletic performance (which NO human could come close to matching?)
A bucket of oats and an apple?

Chirp

Nemesis, you are completely misinformed. You forgot how much work goes into becoming strong, fast, coordinated, etc.

You are completely wrong. Like a surgeon, an athlete puts years and years of work into their craft! Sometimes, even more work than a surgeon. Just because the surgeon's work came behind a desk at a university doesn't mean it's any more challenging than what some athletes go through. If an athlete desires becoming a professional athlete, that person can work their whole life at honing their craft and still not attain the goal.

You're just another person too bitter with their own life to appreciate other's succeeding.

Chirp

Sports is something that can bring people together, whether animals could perform it better or not is completely irrelevant. Some people enjoy watching others succeed in accomplishing their dreams while the others whine about someone else making too much money.

Chirp

We worry too much about what other people deserve and don't deserve. Nobody owes anybody anything. Work hard for what you get and appreciate that no system is perfect and happiness will ensue.

downthemiddle

I've found that union members rarely complain about their paychecks.. it's the OTHER guy's check that they complain about.

Chirp

Why the hate for professional sports? It's an entertainment industry, no different from television or music.

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