Reports of Sky-High CEO Pay Fuel Fairness Debate

Stephen Miller, CEBS By Stephen Miller, CEBS August 21, 2018

Average compensation for CEOs of the largest publicly traded U.S. companies grew by 17.6 percent to $18.9 million last year, according to a report released on Aug. 16 by the liberal think tank Economic Policy Institute (EPI). From 2009 to 2017, average pay for the nation's top CEOs jumped by 72 percent, according to the report. The ratio of these CEOs' compensation to the pay of their typical employee rose to 312-to-1—far greater than the 20-to-1 ratio in 1965 and more than five times greater than the 58-to-1 ratio in 1989, the analysis said.

CEO pay graph-1.png

Source: Economic Policy Institute.

Employees' belief that they are not being paid fairly compared to top executives can lower morale and depress productivity, studies show.

Below is a roundup of media reports and online posts with insights on this topic.

What's Behind the CEO Pay Surge

CEO pay has grown faster than corporate profits, and faster than overall gains in the stock market. Economists have different theories for why CEOs are making so much money. Some say it's a reflection of their skills and market value, while others believe it's because they have too much power in setting their own pay. Others blame tax rate cuts that created an incentive for CEOs to negotiate higher pay, since they can keep more of it.

The authors of the EPI study suggest traditionally liberal policies to counter this trend, such as reinstating higher top-income tax rates and giving corporate shareholders more influence in setting CEO pay.

Stock Awards Are a Big Piece of the Pie

EPI's $18.9 million figure is an average of CEO compensation among the 350 largest U.S. companies and includes the value that CEOs have realized from stock options, as well as salary, bonus, restricted stock grant awards and other long-term incentive payouts. As a result, that figure appears different from other analyses about CEO pay. A CEO pay report by the executive compensation research and governance firm Equilar, for example, found a median pay increase of 8.5 percent in 2017, rising to $11.7 million from the previous year.
(Washington Post)

[SHRM members-only toolkit: Designing Executive Compensation Plans]

Beware Inflated CEO-to-Worker Pay Ratios

Considering total compensation including benefits for CEOs and rank-and-file workers, and workweeks for rank-and-file workers that would be more comparable to the average hours worked by a CEO of a major multinational corporation in the S&P 500, produces a more accurate apples-to-apples comparison, according to the conservative American Enterprise Institute think tank. Those more accurate comparisons result in CEO-to-worker compensation ratios of between 177-to-1 (for rank-and-file workers averaging 40-hour workweeks vs. average CEO pay) to as low as 104-to-1 for rank-and-file workers putting in 60-hour weeks that might be the most comparable to the average workweek of a top CEO and using median CEO pay.
(American Enterprise Institute)

CEO Pay Ratio Disclosures Put Morale at Risk

Pay for CEOs at the biggest companies in the S&P 500 outpaces CEO pay at the nearly 4,000 publicly traded companies in the U.S. that file annual proxy statements. A March report by pay consultancy Compensation Advisory Partners found that the median pay ratio for CEOs overall was 87 times median-employee pay, based on proxy statements the firm analyzed, and varied greatly depending on the size and complexity of the organization.

Even so, CEO compensation typically dwarfs a typical worker's paycheck, and organizations should be prepared to respond to questions about CEO and median-employee pay in light of news reports that employees might see, and to explain how and why pay is set fairly at the company.
(SHRM Online)

CEOs Sensitive to How Their Pay Compares with Peers

Chief executives paid less than their peers are four times more likely to lay off employees, another study finds. Layoffs are seen as a way to hold down costs and drive up profits, raising CEO compensation. "CEOs are just like any other type of employee," said Scott Bentley, an assistant professor of strategy at Binghamton University’s School of Management, and the lead researcher on the study. "They are going to compare their pay to those around them. The difference is that the average employee can’t make strategic decisions for the company that influences their own pay. Executives can."



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