Being a CEO has never been more valuable

July 2, 2013

There are a number of reasons no one is particularly worried about wage stagnation among CEOs:

  • Over the last 30 years, CEO pay increased 875%, according to the Economic Policy Institute

  • In 2012, CEO pay at large companies rose 6.5%, according to Equilar

  • The average ratio of S&P 500 CEO pay to employee pay is 204 to 1, according to Bloomberg (the ratio rises to 273 to 1 when companies outside the S&P are included).

  • Bloomberg found that Ron Johnson, the former, and disgraced, JC Penney CEO, clocked in at an astounding 1,795 to 1.

  • In 2012, the value of a typical CEO’s perks rose 18.7%

These figures aren’t just the status quo, they’re the result of a decades-long trend. Bloomberg estimates that the CEO to worker pay ratio was 120 to 1 in 2000, and just 42 to 1 in 1980. In the 1950s, it estimates, the ratio was an absurdly quaint of 20 to 1.

There are three broad factors that together help explain this trend.

First, companies are making a lot of money. As Henry Blodget points out, corporate profit margins have been steadily increasing and are currently at an all-time high. In contrast, wages as a percent of GDP are at an all-time low. As a result, CEOs have results on their side in any discussion of absolute pay levels, and the relative gap between their pay and other workers will also increase.

Secondly, there’s been a broad shift in how CEOs are paid, towards more and more equity. Citing data from Equilar, Gretchen Morgenson writes that “median [CEO] cash compensation was $5.3 million last year, while stock and option grants came in at $9 million”. The past few years have been a good time to get paid in equity. The S&P 500 is up 85% since 2009, and rose more than 11% last year. But market returns alone can’t account for the huge rise in CEO pay. The Economic Policy Institute found that over the last 30 years, CEO salaries rose at a rate “more than double stock market growth”.

Which brings us to the third driver of increasing CEO pay: the increasing value placed on the work of CEOs. The AP writes that “companies say they need to pay CEOs well so they can attract the best talent”. Derek Thompson looks at the embarrassing case of Ron Johnson’s pay relative to his dismal performance and concludes that, while Johnson obviously wasn’t worth the salary of 1,795 ordinary employees, that can only be known in hindsight. He could have been — or was counted on to be — worth every penny and more:

The uncomfortable truth about successful CEOs of enormous companies is that their impact is truly enormous. They touch many people’s lives, and fewer (but richer) people’s portfolios. Any idea that saves JC Penney — along with its tens of thousands of jobs and billions of dollars in wealth — would actually have a financial impact worth much more than 1,795 average workers’ salaries. If only that idea existed.

As long as boards and shareholders believe that an executive might have an idea worth much more than the combined labor of thousands of employees, CEOs will have the leverage in pay discussions. Competent management is not ineffable fairy dust, but if you think it is, it will be priced accordingly.

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