New Studies Prove Gap Between CEO and Worker Pay is Getting Worse

The Fortune CEO Initiative 2018 Annual Meeting June 25th, 2018 San Francisco, CA. Tim Cook, CEO, Apple in conversation with: Adam Lashinsky, Executive Editor, Fortune. (Photo: Stuart Isett/Fortune)

“The survey showed that it would take 158 years for the typical worker at most big companies to make what their CEOs did in 2018, seven years longer than if both were still at 2017 pay levels.”

CEO pay is increasing at twice the rate as pay for regular workers, according to two new studies done by the executive compensation firm Equilar for the Associated Press.

The data examined the pay of 340 CEOs at the S&P 500, finding a median pay raise of 7% in 2018, around $800,000, while average workers’ salaries grew by only 3%.

“The survey showed that it would take 158 years for the typical worker at most big companies to make what their CEOs did in 2018, seven years longer than if both were still at 2017 pay levels. And when top executives are already making so much more than their employees, the bigger percentage raises compound the widening financial gap,” said the Associated Press report.

Stock Buybacks

The studies showed companies have tied an increasing amount of executive pay to stock prices, which have benefited from an unprecedented surge in share buybacks. Buybacks refer to when a company buys back its own shares, a process which has come under fierce bipartisan criticism from lawmakers like Sen. Bernie Sanders (I-Vt.) and Sen. Marco Rubio (R-Fla.).

Critics argue buybacks detract from investment in research and development and wage hikes for workers, while reaping disproportional rewards for shareholders, board members and executives. Christine Joll, a Yale professor who researches behavioral economics, believes executive pay’s growing connection to stock options incentivizes stock buybacks.

The economist Dean Baker argued skyrocketing executive compensation is an important contributor to the rise in pay inequality: “While the heads of major corporations were always well paid, we saw their pay go from 20 to 30 times the pay of ordinary workers in the 1960s and 1970s to 200 or 300 times the pay of ordinary workers in recent years.”

Incentivizing Increasing CEO Pay

The evidence contradicts the claim that CEO pay correlates with the value they bring to their companies, as executives were often paid lavishly despite scandal or complete failure.

Wells Fargo’s former chief executive Tim Sloan, who resigned in March after fallout from the banks fraudulent accounting scandal, received $24 million upon leaving. Sears former CEO Eddie Lampert drove his company into bankruptcy and is accused of stripping its assets for personal benefit, but refuses to pay $43 million in severance to Sears workers who lost their jobs despite his $1.1 billion dollar net worth.

Baker says rising CEO pay is due to the incentive structure of the board of directors, who are responsible for determining executive pay.

Steven Clifford, who spent 13 years as a CEO, explains in his book The CEO Pay Machine how the board is often composed of the executive’s friends, who have no corporate governance to prevent them from rewarding lavish compensation packages. According to Clifford, being a board member is a cushy job of around 150 hours of work a year, and the average director pay in the Fortune 500 is around $250,000 a year.

“If the CEO is making $20 million to $30 million a year, it’s a safe bet that the chief financial officer and other top executives are pocketing around $10 million. The next echelon down is likely earning over $1 million. This also shapes executive salaries outside of the corporate sector. It is common now for university presidents and heads of major foundations to be paid over $1 million a year and sometimes even multiple millions,” Baker explained.

Disney Heir Stirs Up Controversy

Abigail Disney, Walt Disney’s great-niece, stirred controversy after criticizing Walt Disney Co. for the “naked indecency” of its pay scales. The Disney heir cited data from Equilar showing that CEO Robert Iger earned more than $65 million in 2018, which is 1,424 times more than the median salary of a Disney employee.

Meanwhile, a 2018 study by researchers at Occidental College and the Economic Roundtable, found 73% of workers at the Disneyland resort saying they did not earn enough to cover basic expenses every month.

“I’m not arguing that Iger and others do not deserve bonuses,” Abigail Disney wrote in an op-ed for the Washington Post. “They do. They have led the company brilliantly. I am saying that the people who contribute to its success also deserve a share of the profits they have helped make [that] happen.”

“It is possible to say no to money,” Disney said. “If CEOs don’t lead this by making a conscious ethos shift, then I don’t know where we’re gonna go.”

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