Average CEO pay for the top 350 biggest firms was $15.5 million in 2015, according to a new report released by the left-leaning Economic Policy Institute. That represents a 276 to 1 pay ratio to the typical worker.
What’s shocking is that’s down from last year. In 2014, the CEO-to-worker compensation ratio was 302 and the average pay was $16.3 million.
Economist Lawrence Mishel, who led the study, was initially surprised. “CEO compensation is something that usually doesn’t go down unless there’s a big tech bubble burst [like] in 2000 [or a] financial crisis,” he said.
He wondered: Are we seeing some restraint in executive pay, or is it something else?
The Economic Policy Institute’s measure for CEO compensation includes salary, bonuses, long-term incentive payouts, restricted stock grants and stock options. It just so happens that the stock market went down in 2015 — and as a result, the value of CEO stock options went down, and they cashed in fewer stock options. The Economic Policy Institute estimates that this alone accounted for more than 80 percent of the decline in pay between 2014 and 2015.
Thus, Economic Policy Institute concluded, we can expect CEO pay to go up — as stock prices go up.
Even though CEO pay went down in 2015, over the past 50 years, the trend has been up. In 1965, the average CEO-to-worker ratio was 20 to 1.
It has surpassed inflation and then some. While the typical worker’s annual compensation has grown 10.3 percent since 1978, inflation-adjusted CEO compensation increased 940.9 percent.
So why has CEO pay climbed so sharply over the years?
“CEOs live in a Lake Wobegon world that every firm believes that their CEO is special and therefore needs to be paid above average,” said Mishel. “And there’s very little push back in terms of the governance and procedures within firms.”
“I suspect that as companies become bigger and bigger and more global, there’s been a trend to pay CEOs more,” said Veronique de Rugy, a senior research fellow at the market-oriented Mercatus Center at George Mason University. “The risk of being a CEO of a multinational is completely different than it was in the 1970s.”
As a result, the pool for of people qualified to be CEO of such a global company may be small, de Rugy suggested. That gives CEOs some leverage when it comes to pay.
And if CEOs increase productivity or make the business more profitable, don’t they deserve their millions?
Mishel dismisses such performance pay theories.
“Our research suggests that it has very little to do with CEOs being more talented,” said Mishel. “Pay is tied to the stock markets, and it’s not tied to: did the price go up in my firm more than in firms that I compete with?”
So how does CEO pay affect the typical worker?
“Their big pay increases really come at the expense of what was available for other wage earners,” said Mishel. “So they’re skimming off the top and leaving less for the rest of us.”
Additionally, it appears that when CEOs are paid enormous amounts of money, it has a spillover effect, and other executives and managers are paid more.
The Economic Policy Institute report states that “the growth of CEO and executive compensation overall was a major factor driving the doubling of the income shares of the top 1 percent and top 0.1 percent of U.S. households from 1979 to 2007.”
In the meantime, the percentage of those in the middle class has fallen in the past four decades, according to a December report by the Pew Research Center.
To prevent outsized CEO pay, Mishel suggests policies that would include removing the tax break for performance pay and reinstating higher marginal income tax rates at the top.
But Veronique de Rugy warns against regulations and does not believe CEO pay is coming at the expense of workers.
“The best thing you can do for workers is actually grow the economy,” said de Rugy. “It’s going to be way more productive than artificially capping, whether it’s through taxes or regulations, the wages of CEOs.” Businesses, she said, will find a way around such regulations if they can.