Over the past few years, many economic indicators have returned to where they were before the Great Recession — among them, the unemployment rate, which has dropped below the 5 percent mark of 2007, housing prices and the stock market, which has nearly doubled its pre-recession peak.
Another, buoyed by rising stock prices: the enormous pay difference between CEOs of the largest U.S. companies and their employees, who earn more than 300 times less than those at the top, according to new data.
Here’s a closer look at the issue.
How has CEO compensation changed?
In 2000, the average CEO was paid 343 times more than the average worker, according to the liberal-leaning Economic Policy Institute. That number dropped to about 188-to-1 in 2009.
It has since rebounded to 312-to-1 last year, according to a report from the Economic Policy Institute.
From 2016 to 2017, the average pay of CEOs from the top 350 publicly traded firms increased 17.6 percent — to $18.9 million — even after being adjusted for inflation, the group found.
Other analyses find a slightly less drastic increase in the gap between executive and average workers’ wages.
A Wall Street Journal analysis published earlier this year found the median pay for chief executives of the 133 largest U.S. companies increased 9.9 percent, reaching an average of $11.6 million last year.
Another report from Equilar, a company that tracks data relating to corporate governance, found CEOs across 100 companies were on average earning 235 times more than the average worker.
“It’s emblematic of the unequal recovery and an increasingly disparate market for workers and executives,” said Lawrence Mishel, a senior economist at the Economic Policy Institute.
What’s behind the pay gap?
It is important to note that the pay gap between CEOs and average worker is real, but also largely symbolic.
CEO pay data is publicly available, and the Securities and Exchange Commission recently required publicly-traded companies to publish the ratio of their CEOs’ salaries and the median compensation of other employees.
CEOs are not the only ones being paid hundreds of times more than the average worker, but the salaries of hedge fund managers and private equity analysts, for example, are not as easily available to the public.
The pay increases CEOs and other company executives have see over the past decade have come mostly from stocks that are part of their compensation packages.
If stock options are not included in CEO annual compensation, the executives are actually paid slightly less than they were in 2000, according to the Economic Policy Institute data.
Steve Kaplan, a University of Chicago Booth School of Business professor who studies economics and corporate governance, said stock options are important to corporate profitability because they ensure executives’ personal success is tied to the company’s performance.
“CEOs have basically crushed it,” Kaplan said. “Maybe they are doing too good of a job because instead of being congratulated, they are criticized.”
The link between pay and profit
Large corporations are making near-record profits. At the end of last year, corporate profits accounted for more 9 percent of the country’s GDP, above the historic average of 7.5 percent.
The Dow Jones Industrial Average ended 2017 about 25 percent higher than where it began the year. If you compare CEO compensation to that number, Kaplan said companies could even make the case that their executives are not getting paid enough.
Others argue that basing executives’ compensation on stocks encourages companies to overinflate their stock value using buybacks.
As the PBS NewsHour recently explained, companies have a variety of options when it comes to spending their profits.
They can purchase new equipment, invest more in research and development or hire more employees. They could also pay existing workers more.
“Or they could buy back shares to increase the profitability of their shareholders and, in many cases boost the income of their corporate executives whose pay is often based on the value of those shares,” said Jared Bernstein, an economist who worked in the Obama administration. “They’ve been choosing a lot of the latter.”
Research from the National Employment Law Project and the Roosevelt Institute found that between 2015 and 2017, companies spent almost 60 percent of their net profits on stock buybacks.
Who benefits from stock buybacks?
Some economists argue buying back stocks artificially inflates stock prices, which again means more money for the executive and other wealthy shareholders.
But Republican economist Douglas Holtz-Eakin, who admits he is not a fan of connecting CEO pay to stock prices, argues other factors like tax cuts have a greater influence on stock prices. Plus, he said, executives are not the only one who benefit from buybacks.
“The biggest holders of corporate stocks are actually retirement plans, your 401(k)s, your IRAs, your pension plans that unions and others have,” Holtz-Eakin said.
But those employees would only benefit if the stock price stayed higher long term, said Irene Tung, a policy analyst with the National Employment Law Project.
“The average shareholder, the retiree with the pension fund or the 401k, is not benefiting from this at all. This is really benefiting the very, very elite few,” she said.
Tung points to a speech Security and Exchange Commissioner Robert Jackson gave in June, where he said more company insiders sell their stock in the days after the company announces it is buying back the stock, allowing them to make money off the inflated stock price.
Jackson said the practice is “not necessarily illegal” but “troubling.”
Retirement plan holders do not sell their stocks at the peak price, so they are not likely to benefit from the price going up temporarily.
How to close the gap
The reason for the pay disparity between CEOs and employees is relatively simple. Closing the gap is much more complex.
A number of methods have been proposed to close the gap, including a cap on compensation, clawbacks for poor performance or executive misconduct, and, as mentioned previously, mandatory publishing of CEOs’ salaries.
James Galbraith, the director of the University of Texas Inequality Project who also served as an adviser to Sen. Bernie Sanders’ presidential campaign, said U.S. companies should look to other countries where laws encourage business leaders to reinvest in their tangible products instead of their stocks.
Sanders introduced the not-so-subtly-named Stop BEZOS Act earlier this month that would force large companies like Amazon and Walmart to pay a tax equal to the amount of government aid their low-wage workers receive.
Amazon CEO Jeff Bezos was paid a salary of $81,840 last year plus another $1.6 million that was spent on his security. But Bezos, who is one of the richest people in the world, is also the company’s largest shareholder and Amazon’s stock rose 56 percent in 2017. The average Amazon worker — including part-time and seasonal employees — made $28,446, according to an annual Securities and Exchange Commission filing.
President Donald Trump recently asked the SEC to consider eliminating quarterly-earnings requirements for public companies. Gabraith said that proposal will need to be studied thoroughly, but does signal that the president recognizes company decisions are often driven by a desire to please investors in the short-term instead of by sustainable long-term business practices.
Still, even if CEO pay comes down, that does not automatically translate to more money for the average worker. That is why Galbraith advocates for increased access to health care, more investments in the income tax credit and increasing the minimum wage to $15 per hour.
The nationwide push called the “Fight for $15” has gained steam in the form of regular protests organized by labor unions and other workers’ rights groups but has been a non-starter with federal lawmakers.
Adjusting CEO pay “would affect the Fortune 500 people,” Galbraith said. “The minimum wage would affect millions.”