In 2015, CEOs got a ... pay cut
Chief executive officers of America's largest publicly traded firms took home less in 2015 than they did the prior year, but the dip in compensation isn't likely to elicit much sympathy when taken in context.
In its latest study on CEO pay, the Economic Policy Institute (EPI) reports that the CEOs of America's 350 largest publicly traded firms (as measured by their total sales) made an average of $15.5 million each in 2015, down about 5 percent from what they earned in 2014.
Even with that drop, large-company CEOs earned a whopping 276 times the average annual pay of the typical U.S. worker in 2015. What's more, the CEO-to-worker compensation ratio in 2015 remained "light years" beyond the 20-to-1 ratio of 1965, according to the study by EPI, a nonprofit think tank focused on low- and middle-income workers.
Last year's slippage in CEO compensation was largely the result of faltering stock prices in late 2015, rather than any real change in how corporate boards approach CEO pay. In 2015, sagging stock prices lowered the potential value of stock options awarded to CEOs and thus the realized value from options exercised during the year.
Given that last year's decline in compensation mostly reflected a dip stock prices, CEO pay is likely to continue its "sharp upward trajectory" when the stock market picks back up again, according to the report.
Stock options make up a larger component of CEO pay than they did in the 1970s or '80s partly because of changes in tax code under President Bill Clinton, explained Lawrence Mishel, president of EPI and a lead author of its CEO pay report.
In an effort to limit executive pay, Clinton's first budget established an IRS provision stating that companies could deduct only the first $1 million of compensation for their top executives from their corporate taxes. But the provision exempted so-called performance-based pay, including stock options, which continued to be tax-deductible.
Interestingly, the rise in CEO pay has far outpaced the performance of the stock market, despite the shift toward stock-related pay in recent years. From 1978 to 2015, inflation-adjusted compensation for CEOs of the largest publicly traded firms rose by more than 940 percent, according to the EPI report. That increase was 73 percent greater than stock-market growth for the same period (as measured by S&P 500 index) and substantially higher than the "painfully slow" 10 percent growth in a typical worker's yearly pay.
Mishel attributes the eye-popping rise in CEO pay over time largely to the fact that CEOs have gotten little resistance from corporate boards in their pursuit of higher compensation. In addition, the low marginal income tax rate on the top earners has given CEOs an incentive to press for higher pay over the last several decades, he added.
EPI is advocating for greater use of "say on pay" rules, which allow a firm's shareholders to vote on top executives' compensation. It contends that greater use of "say on pay," along with certain other policies, would limit and reduce incentives for CEOs to "extract economic concessions without hurting the economy."
"Compensation-setting committees live in a Lake Wobegon world," said Mishel, referring to fictional town that's the setting for Garrison Keillor's popular radio show, "Prairie Home Companion."
"If you have chosen someone that you think is above average to run your company, then you would certainly want to pay them more than their peers. You end up with an escalation of CEO pay with very little pushback" from corporate boards, he said.
The escalation in CEO pay, added Mishel, has had significant consequences for the average U.S. worker. The sharp rise in CEO compensation, he explained, has contributed to income-growth inequality by establishing a pattern when it comes to pay for top managers within private-sector companies and in parts of the nonprofit world, such as universities and hospitals.
"It is not just that CEO pay is unseemly," said Mishel. "The consequence of rising CEO pay is that a lot of the growth [in profits] is skimmed off to the top and is not available to everyone else."