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 Market Mysteries of the week

  Are CEOs making more money than ever?

Answer:

Yes, CEOs are not struggling right now.

Do CEOs get paid the same way as the rest of us?

The majority of CEO pay is performance-based

. CEOs receive a base salary paid in cash, stock awards, and cash bonuses. The latter two sources typically make up the bulk of their compensation. These performance-based pay structures allow companies to align the CEO’s incentives with business goals while also providing certain corporate tax advantages.

The flexibility can lead to a wide disparity in pay structures:

Since the CEO doesn’t have a manager,

the company board and its shareholders determine these pay packages.

Usually, there’s some “compensation committee” formed by board members or outside consultants to suggest the package structure. The board decides whether to adopt it. Then shareholders vote to approve. Last month, median

CEO pay for America’s biggest companies reached an all-time high of $14 million.

Have CEOs always made this much?

CEOs have always been at the top of the pay scale, but

their pay has been growing a lot faster than everyone else’s.

Since 1978,

CEO pay has grown 1,322%

,

far faster than the 18% earnings growth of the typical worker

, adjusted for inflation. CEOs have even distanced themselves from their closest subordinates. The compensation of the top 0.1% of earners has only grown 341% in that time. CEOs currently make, on average, about

6.4x more than the very highest wage earners

.

When did we decide CEOs were worth so much more?

The wage inequality hasn’t always been this dramatic.

In the late ’70s,

CEOs made ~30x more than the average worker,

but now that ratio is over 350x.

In the last year, CEO pay has grown 19%

, while workers'

average hourly earnings have only increased 5.6%

, not considering the

8.5% inflation

of the past year. The

federal minimum wage also hasn’t improved

from

$7.25 per hour in thirteen years

.

The graph below shows the increase in the

ratio of CEO pay

to that of the average worker over the last sixty years:

Will this trend of inequality ever change?

There will need to be more pressure for action on both ends of the pay spectrum.

As we’ve written about before

, working full-time at the current

minimum wage doesn’t cover the necessary costs of living in any US state

for even a single adult. A $15/hour wage offers a living for a single adult in about half of states, but nowhere for a family of four with two working adults.

There is a growing worker movement towards unionization, calling for higher pay

.

Considering the other end of the spectrum, the challenges and responsibilities of these corporate leaders are rapidly evolving.

It will be up to the shareholders to identify what’s appropriate for each company and leader.

Shareholder approval of pay packages is typically assumed, but

the naysayers have been growing

. Last year CEO pay proxy votes had a median 94% approval rate, but that’s

the lowest rate ever

. The declining approval rates indicate a growing dissent from shareholders for these rapidly-inflating pay packages.

Do you know how much your CEO gets paid? If you work for a public company, it’s public information.

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