Controversial Pay Debate– CEO Vs. Worker Pay Gap: What’s CEO Worth? What’s Worker Worth? Who Decides?

CEO Vs. Worker Pay Gap: It’s good to be a Fortune 500 CEO these days at least pay-wise, e.g.: *One CEO Hour = 1,372 Minimum Wage Hours* or *One CEO Person = 354 Workers*. According to the 2014 AFL-CIO Executive PayWatch; it’s 331 times better to be a CEO than an average worker; the average CEO of an S&P 500 company made $11.7 million in 2013, while the average worker earned $35,293…

According to Gillian B. White; business has become more efficient and profitable but workers aren’t sharing in the benefits… When you look at the relationship between worker wages and productivity there is a wide and many believe, problematic, gap that has arisen in the past several decades…

According to Economic Policy Institute; productivity (defined as output of goods, services per hour of work) grew by about 74% between 1973-2013, while wages for most workers grew at a much slower rate of only 9% during same time period… According to Richard Trumka; these huge gaps are wrong, it’s unfair, it’s bad economics…

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However, while most headlines on CEO pay focus on the total  compensation packages of the CEOs of the largest public companies, the reality is that the vast majority of CEOs do not enjoy multi-million dollar pay packages… According to ‘Chief Executive’; of the roughly 30 million businesses in the U.S. fewer than 6,000 are publicly traded and only the largest 8% of these public companies make it into the S&P 500… Despite this reality, most media outlets focus on the $12 million average pay package among S&P 500 CEOs, or even more misleading, the $38.7 million average annual pay package for the CEOs of the largest 200 companies…

According to ‘2014-2015 CEO and Senior Executive Compensation in Private Companies Report’; the median private company CEO earned $343,000 in cash compensation in 2013 (base salary and bonus) and total compensation of $378,000, including; benefits, perks and equity gains… Median total compensation for private company CEOs was up approximately 5% from the prior year– outpacing the inflation rate of 1.5% in 2013– but not growing as fast as pubic-company CEO compensation packages. The S&P 500 median package increased by 9.5% over the same period…

In the article Pay Gap Between CEOs and Employees by Elliot Blair Smith and Phil Kuntz write: Under the Dodd-Frank law passed by Congress, several years ago; public companies must reveal their CEO-to-worker pay ratios, but many companies still are not making this numbers public…To get a sense of what such ratios could reveal, we conducted an experiment: We compared the disclosed CEO compensation information mandated by the SEC, including; salary, bonus, perks, changes in pension accrual, and the value of stock-based awards… with U.S. government data on average worker pay and benefits by industry. (Most companies don’t disclose actual payroll information for employees.) In addition we used the industry-specific averages for workers compensation, which compares CEO pay with the ‘average’ for all rank-and-file employees in the U.S., while the law calls for using the ‘median’ of all employees, including; executives other than the CEO…

Others organizations who have calculated similar pay ratios, such as; the AFL-CIO, didn’t differentiate worker pay by industry or include employee benefits in their math, but others like Bloomberg News did, which tended to make the ratios smaller. (The AFL- CIO’s average ‘CEO-to-worker’ multiple at large U.S. companies is 357. Bloomberg’s average ratio for Standard & Poor’s 500 companies is 204; the average of the top 100 companies is 495. That is, CEOs of the companies averaged 495 times the income of non-supervisory workers in their industries.) There’s no question that using industry-wide averages as the denominators is not a perfect substitute for the real pay ratios that Dodd-Frank calls for, but this a reasonable approximation to demonstrate the point…

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In the article Pay Gap Between CEOs and Workers is Much Worse by Roberto A. Ferdman writes: A study conducted at Harvard Business School found that Americans believe CEOs make roughly 30 times what the average worker makes in the U.S., when in actuality they are making more than 350 times the average worker… According to the study; Americans drastically underestimated the gap for actual incomes between CEOs and unskilled workers… But that underestimation isn’t merely drastic; it’s also unmatched in the world. The gap between Americans’ perception and reality is the most among any of the 16 countries for which the researchers measured, both for the perceived and the actual pay inequality…

The U.S. CEOs are significantly better paid than those from just about anywhere else, for example; average Fortune 500 CEO makes more than $12 million per year, which is nearly five million dollars more than the amount for top CEOs in Switzerland, where the second highest paid CEOs live, more than twice that for those in Germany, where the third highest paid CEOs live… While a handful of countries might perceive larger ‘pay gaps’ than the U. S., none of the ones surveyed have an actual pay gap anywhere nearly as large. In Switzerland, the country with the second largest CEO-to-worker pay gap, chief executives make 148 times the average worker; in Germany, the country with the third largest gap, CEOs make 147 times the average worker; and in Spain, the country with the fourth largest gap, the ratio is 127 to one…

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In the article Are CEOs Paid Too Much? by Jack L. Lederer writes: The problem isn’t that CEOs are paid too much, it’s that outstanding employees are paid too little. Most top performers earn hardly more than the average, although they work much harder and create greater value: The solution? Implement a broad-based compensation system that defines and rewards outstanding performance… But, the criticisms are familiar: ‘CEO pay is unrelated to company performance’ or ‘No one is worth that much money’… And the most emotional of all: ‘The pay gap between CEOs and average employees is destroying the social fabric’…

But, the facts are just the opposite; most companies are strengthening the ties between CEO pay and company performance. Good chief executives are well worth the money that they earn, given their unique talents, and the enormous value they create… And, the pay differential between the ‘typical’ CEOs and ‘average’ workers is usually much less than what some critics (and politicians) claim… But while most companies do not overpay their CEOs, they do underpay outstanding non-executive workers. These high-achieving workers are lucky to earn even 10% more than the average… The solution is to design reward systems that deliver outstanding pay and other benefits for outstanding worker performance…

In the article Executive Pay Controversy by Anthony Smith writes: The outrage over executive compensation is largely a perception vs. reality issue. The perception is that a $5-10 million compensation package is out of balance because it’s either too large of a multiplier of an average worker’s salary or its greater than shareholders’ perceived rate of return on investment: Or both. This perception was a key factor in passage of a House of Representatives bill requiring public companies to put executive pay packages up for an advisory vote by shareholders. Unfortunately, many of those ‘outraged’ have failed to consider several important points.

  • Consideration #1: The reality is that the free market is alive and well, and is the true dictator of CEO pay. While what one’s peers are making is still a legitimate barometer, critics should look at the macro economics of ‘stars’ in all fields (after all, CEOs are the ‘stars’ of the business world), and not just the micro economics of CEO pay, if they are serious about understanding the calculus in determining compensation…
  • Consideration #2: Few people can– perform music like Bono, write books like Harry Potter‘s J.K. Rowling, play golf like Tiger Woods… They all have unique talents that the free market has decided are worth millions of dollars each year, even though Woods doesn’t win every ‘major’ and every album of U2’s is not double platinum… Likewise, only a handful of people are capable of leading major multinational corporations with 100,000+ employees and $50+ billion in annual revenue…
  • Consideration #3: These unique people create more than just entertainment value; they create thousands of jobs, deliver a lifetime of wealth for legions of investors, drive life-changing innovation… IBM’s Lou Gerstner saved a U.S. institution; Herb Kelleher at Southwest Airlines defied industry logic by consistently delivering profits, in the toughest of times; Many people became wealthy investing in GE; and yes, Jack Welch did have something to do with it…
  • Consideration #4: Unlike an artist with a distinctive talent, a CEO’s craft and contribution is highly subjective, you need to find an objective means, in this highly subjective universe, of separating a CEO’s overall performance from the number attached to his or her compensation… Historically, compensation was negotiated based on potential and probability of success, but company’s must now move closer to a ‘merit-based pay for performance’ model that will indeed drive greater differentiation…

Forward-thinking companies must negotiate a new contract with their workers, one that fits the demands of the next century… According to Jack L. Lederer; the workers’ agreements for the 21st century must accomplish three critical objectives: First, it must lure highly talented, self-confident, team-oriented employees who are comfortable with risk… Second, it must reinforce a culture of performance by delivering significant rewards to those workers who make outstanding contributions… Third, it must inspire team-oriented behavior, and treating workers more like business partners…

According to Peter Drucker; excessively high multiples undermine teamwork and promote a winner-takes-all attitude, and that is poison to a company’s long-term health… I’m not talking about the bitter feelings of the workers on the plant floor– they are already convinced that their bosses are crooks anyway– it’s the people in middle management who become ‘incredibly disillusioned’ by runaway CEO compensation: It’s morally unforgivable…

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According to Weinberg and Davide Dukcevich; this is a free market capitalist system which tends to produce the best possible outcome for the greatest number of people, and nowhere is that more true than in the labor markets… and, nowhere is that principle more generally ignored… Many well-intentioned people love to muck with the seamless operation of supply and demand, and especially the labor markets; they interfere with– hiring, firing, mandate everything from vacation time to minimum wages…

But are workers any better off for all this well-intentioned meddling? When, in fact, most companies are concerned about the well-being of workers, about fairness, about social responsibility… it’s just good business… However, without begrudging the compensation being offered to executives; wage systems, in general, both for CEO and worker, must be better connected to current market and social realities…