A market economy is a good thing unless it’s not. There are many articles about CEO pay and it is easy to question the rationale for such large gaps between different CEOs, let alone between CEO’s and the average worker. Are companies really willing to pay that much more for executive presence? Most CEO’s do not make the headlines in terms of their pay packages. In working with some great CEO’s, I know the job is much tougher than it looks. It is also much riskier than most jobs.
An Associated Press article listed the market forces at work that are creating the expanding pay gap. For a link to the full article, see below. The abbreviated list is:
1. They’re paid heavily in stock … stock awards were up 17% last year which is the highest on record. The long-term gain for stock also has a favorable tax rate so more is kept in the pocket. The S&P average last year was up 30% and is setting records again this year.
2. Peer pressure … since no board wants to hire an “average” CEO there is a bias toward higher and higher pay packages to “attract the best and the brightest” even though the objective measurements are almost nonexistent.
3. The superstar effect … when athletes can earn tens of millions of dollars for playing games and have half the year off, why shouldn’t we pay more for a star CEO? If 20-something sports superstars make so much more than those at the “bottom”, why not the experienced CEO? We tend to give CEO’s more credit, and more blame, than they deserve in terms of their impact on their company.
4. Friendly boards of directors … who were picked by the CEO and were (or are) CEOs from other companies. They tend to buy into the high compensation justification.
5. Stricter scrutiny … that CEOs face today makes their job more risky. To attract and keep good CEO’s they feel the need to give the CEO “hazard pay” to compensate for the risk.
Why many of us aren’t getting a raise
1. Blame the robots (and computers) … who are taking over many jobs or increasing productivity such that fewer workers are needed. Nearly 45% of workers who have attended at least some college earned under $10.10 per hour last year. College degrees continue to command significantly more pay on average.
2. High unemployment … the Great Recession and the technologically unemployed causes higher unemployment for some who may never recover fully. Pressure for higher pay to retain or recruit is low. There are many candidates able to replace most workers today.
3. Globalization … makes many jobs direct competitors to workers in low-wage countries. The average Chinese factory worker makes one-tenth of their counterpart in the US. China also graduates more competent low wage engineers than the US has in total graduates from college.
4. Weaker unions … are both a part of the result and part of the problem. There is less collective bargaining for higher wages.
5. Low inflation … averaging 1.6% takes away the argument for higher wages to keep up with inflation.
For the full article: [… The CEO of your company just got a huge raise. You didn’t. Here’s why.]