A New Report Shows How CEOs Are Getting Away With Something You Never Could
Imagine one of your colleagues failed to deliver on one of the key responsibilities of his job, but at the end of the year received a far bigger raise than everyone else at the company. At major corporations around the United States, CEOs appear to be pulling off just that feat.
Executive data firm Equilar conducted a study for the Associated Press and found that at the largest companies in the United States, CEOs received a 4.5% raise in pay in 2015 — nearly twice as much as the typical American worker — while investors earned nothing from owning stocks at those companies.
The AP reports the typical CEO in the Standard & Poor's 500 index saw their pay increase from $10.3 million in 2014 to $10.8 million in 2015, a sum that includes salary, bonuses, stock awards and other forms of compensation.
The uptick was actually the second lowest of the past half-decade, in part because in the past few years companies are increasingly beginning to connect the way that chief executive officers are paid to how their companies' stocks perform.
"About a quarter of CEO incentive awards in the S&P 500 use total shareholder return as one of their measurements of performance. That's more than double the percentage from three years earlier," the AP reported.
But in the scheme of the past few decades, top CEOs are doing very well. A 2015 Economic Policy Institute report found that among the largest 350 publicly owned firms in the United States, CEOs make triple what they did 20 years ago, and at least 10 times what they earned more than 30 years ago, a pace of growth that dwarfs even other classes of workers that had strong gains.
A Stanford University poll published in February found that 74% of Americans believe that CEOs are being paid inappropriately relative to normal workers.
"There is a clear sense among the American public that CEOs are taking home much more in compensation than they deserve," David Larcker, professor at Stanford's Graduate School of Business, said of the poll results when they were published. "While we find that members of the public are not particularly knowledgeable about how much CEOs actually make in annual pay, there is a general sense of outrage fueled in part by the political environment."
While the public might not be well-versed in CEO compensation statistics, their intuition is broadly correct. As they've seen large leaps in their compensation for the past few decades, most ordinary workers have seen little to no growth in their wages. Over the past half-century, CEOs at the country's largest public companies have gone from making 20 times the pay of a typical worker in their industry to over 300 times as much.
While defenders of rewarding top CEOs with tremendous amounts of money argue that the pay is simply a reflection of the market's demand for tremendously talented individuals, there's substantial evidence it is in part the product of cozy corporate board arrangements, and that bringing pay down significantly wouldn't have an adverse effect on CEO performance.
In fact, some policy experts would argue reducing CEO pay could be a good thing for big companies: one 2014 study found that the higher paid CEOs are, the worse their companies fare in stock performance, largely due to their overconfidence.