The gap between pay for U.S. chief executive officers and the people who work for them has widened sixfold in three decades. Do bosses work six times as hard these days, or have they gotten smarter or scarcer? Company boards seem to think it’s all of the above. They say large pay packages stem from fierce competition for talented managers capable of leading global organizations, and that pay is closely tied to performance. Critics argue that executives get rich at the expense of shareholders and other workers, abetted by pliant directors who Warren Buffett has called less “Doberman” than “Chihuahua.”
Starting this year, publicly traded U.S. companies must calculate how their CEO’s compensation compares with the median pay of all employees. The 2010 Dodd-Frank Act requires companies to disclose such pay ratios in regulatory filings. Prime Minister Theresa May is proposing similar disclosure rules for British bosses, even though remuneration for CEOs at large, publicly traded U.K. companies declined 17 percent in 2016. A German lawmaker in the European Parliament is also seeking to force banks in the EU to disclose a pay ratio. It’s all part of national efforts to tackle income inequality. A 2014 global survey showed people in many countries think pay gaps are smaller than they really are. U.S. respondents to the survey thought the ratio of CEO to average worker pay was 30-to-1. In reality, leaders of S&P 500 companies made about 347 times more than their employees in 2016, up from 41-to-1 in 1983, according to the AFL-CIO labor union. Pay for many Americans, meanwhile, has barely moved for decades. The Dodd-Frank law also requires companies to let shareholders approve or reject executive-pay policies. While these say-on-pay results aren’t binding, as they are in Switzerland, the vote itself has given investors a way to grab boards’ attention and publicly express discontent. Sometimes that prompts companies to change pay plans, since poor results can draw the attention of activist investors and embarrass directors. Still, a vast majority of corporations win these votes with flying colors.