Average CEO pay in the United States’ biggest companies has been increasing at a moderate rate over the past few years, rising to $US11.4 million in 2013, according to a new Wall Street Journal report.
Their pay rose 5.5% over 2012, while wages and salaries for private sector workers rose 1.8% over the same period.
According to the Associated Press and Equilar, the median pay package of CEOs of S&P 500 companies was 257 times more than the salary of their average employee, up from 181 times more in 2009.
To many Americans, this appears to be a travesty and a symptom of dangerous inequality.
But even though a top CEO’s annual pay package may still be an unfathomable amount of money for most people, defenders of this recent increase in pay think anger toward it is misguided. They say that it is largely the result of a healthy stock market and also point to the fact that a large majority of shareholders, those who want to avoid losing money on poorly performing executives, approve of how much their companies’ CEOs are making.
“As the public cried for executives’ pay to be tied to performance, that trend has very much happened,” says Kevin Scott, co-founder/CEO of branding consulting firm the ADDO Institute. “And now, as their stocks are performing at very high levels, those CEOs are reaping the benefits.”
During the recession, critics were upset that executives could enjoy big salaries and bonuses as their companies performed terribly in the stock market.
When the Dodd-Frank Act passed in 2010, its Wall Street reforms included a “say on pay” provision that gave shareholders the right to vote on an executive’s pay package every three years.
Companies’ boards have responded to this regulation, and there has been a trend toward basing CEO compensation on how well a company is doing in the market relative to its competition. “They have learned to avoid investor pay irritants and red flags, such as compensation that is not linked to performance and pay perks to cover taxes executives owed,” the Wall Street Journal reported in April.
U.S. stocks are at all-time highs, and so it follows that many CEOs of the nation’s biggest corporations are making more money than they were a few years ago.
Furthermore, inequality is down from the boom years of the late 90s, where the average pay of an S&P 500 CEO hit a high of 350 times that of the median household income, according to the University of Chicago’s Booth School of Business.
Chicago Booth professor Steven Neil Kaplan has written extensively on executive pay, and agrees that inequality is a real concern. He believes, however, that although there are of course exceptions, CEOs’ pay packages are not the result of greed and excess, and argues that CEO pay should be compared with the salaries of other high-earning professionals: “If you look at CEO pay compared to the average pay of people in the top 0.1%, it’s about where it was 20 years ago — in line with [that of] lawyers and private-company executives, and less than hedge-fund managers,” he said last year.
Kaplan also believes that there’s a bigger gap in pay between big corporations’ CEOs and their employees than in the 60s, 70s, or 80s partially because technology has allowed executives to control more profitable, global companies. He thinks that even though inequality was higher in 1999, people weren’t rallying against the 1% because the economy was growing.
Essentially, Kaplan thinks CEO pay of the nation’s biggest corporations is generally fair and justified, and paying them less would not somehow raise the standard of the lower and middle classes.
ADDO’s CEO Scott believes that if shareholders are happy with a board’s executive compensation and the company is making money, then executives are incentivized to work harder and the company should have higher returns. “A lot of people think about compensation in terms of extracting value, taking the most you can. But when CEOs focus on creating value … and compensation follows, then everyone wins,” Scott says.
There has been rising shareholder approval of their companies’ executive pay packages, according to the Journal. For example, in early April, 93% of companies in the Russell 3000 index approved of their CEO’s pay.
Those who are still outraged over CEOs’ compensation want government intervention and a shift in focus from a company’s shareholders and board to its employees.
In late May, Democratic Sens. Mark DeSaulnier and Loni Hancock proposed a bill that would link California’s corporate tax rate to executive compensation. It was defeated 19-17, but provides insight into what some critics are looking for.
Currently, California corporations pay 8.84% of their income to the state, and banks pay 2% more. The senators’ bill would have reduced the tax rate for companies in which the CEO’s pay is less than 100 times that of a median employee, and increased on a sliding scale up to 13% for those that passed the barrier. The idea was that the threat of paying significantly more in taxes would compel companies to balance annual pay.
“This is not to vilify those individuals. They work hard. They are creative. But from a historical standpoint, this is not a sustainable model for us to maintain,” DeSaulnier said.
ADDO’s CEO Scott thinks that non-shareholders shouldn’t be telling boards how much a CEO is worth.
“Individuals who have no affiliation with a business or a brand — their opinion should not factor into a CEO’s compensation package. Because the great thing is that we can choose as individuals to do business with whatever businesses we want to,” Scott says.
NOW WATCH: Ideas videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.