Lacking a market, CEO pay is set by a series of complex administrative pay practices. Usually a board, often dominated by other sitting or retired CEOs, sets their CEO’s pay based on the compensation of other highly paid CEOs. The CEO can then double or triple this target by surpassing negotiated bonus goals.
This amount then increases target pay for his or her peer CEOs, giving another bump. Since 1978 these annual rounds of CEO pay leapfrog have produced a 1,000 percent inflation-adjusted increase in CEO pay.
At the same time, the bottom 90 percent of American workers have seen their real incomes decrease by 3 percent.
American workers were once rewarded for productivity. Real wages and productivity rose in tandem at about 3 percent annually from 1945 through the mid-70s. But since then the bosses have taken it all. Although productivity growth increased real per capita GDP by 84 percent over the last 36 years, real wages have remained essentially flat.
Where did the money go? It went to the 1 percent, and especially to the 0.1 percent.
The latter group, a mere 124,000 households, pocketed 40 percent of all economic gains. Business executives, CEOs, or others whose compensation is guided by CEO pay constitute two-thirds of this sliver.
In other words, it’s business executives — not movie stars, professional athletes, or heiresses — who grabbed the dollars that once flowed to the American worker.
Outsize CEO compensation harms American companies, and not just in the tens of millions they waste on executive pay. The effects on employee morale are much more costly. When the boss makes 347 times what you do, it’s difficult to swallow his canard that “there’s no I in team.”