Comment
42
Tweet
12
Print
RSS Feeds

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

Wednesday - 5/28/2014, 6:28am  ET

JOSH BOAK
AP Economics Writer

WASHINGTON (AP) -- 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 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.

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.

   1 2  -  Next page  >>