Center for American progress, May 15, 2006


[Rachel's introduction: Corporate profits and employment are strong. Yet the American dream of a steady job with benefits like healthcare and vacation pay is growing more elusive for many people. While corporate executives are taking home record paychecks, the middle and working classes are treading water at best.]

Report Suggests Correlation Between Higher CEO Compensation and Declining Unionism

A recent report by John Burton and Christian Weller for the Center for American Progress describes how the dreams of upward mobility for middle-class families are plummeting due to stagnant wages and vanishing benefits, while corporate CEOs are enjoying record levels of compensation and corporations are reporting record profits.

The findings show compensation for CEO's is spiraling out of control:

** At the 350 largest public companies, the average CEO compensation is $9.2 million. Compensation for oil and gas execs increased by 109 percent between 2003 and 2004.

** In 2004, the average CEO received 240 times more than the compensation earned by the average worker. In 2002, the ratio was 145 to one.

** These levels of CEO compensation are not the norm for the industrialized world. Typically, CEO pay in other industrialized countries is only about one third of what American CEOs make.

** Highly-compensated CEOs are not being rewarded for performance with the interests of shareholders in mind, the "textbook" explanation of CEO compensation, according to an extensive body of research and reporting.

** After-tax profits are booming and corporate America can easily afford to offer fair wages and benefits to rank and file employees. Unfortunately, while CEOs have enriched themselves, middle-class families have taken hard hits to their paychecks, their health coverage, and their pension plans.

The study suggests a couple of factors which are contributing to excessive compensation. There is a negative correlation between executive compensation and unionization; reducing union workers results in higher pay for CEOs. The fraction of shares held by large institutional investors has a direct relationship with the fraction of executive pay in the form of stock options.

The report looks at the complexities for outsiders to assess the true level of compensation. It discusses the difficulties in understanding what a fair compensation package is due to the various forms of compensations and compensatory perks outside of a firm. It also looks at different forms of payments being made to CEOs as opposed to forms used by other firms.

The report also discusses the executive entitlement system in which the elite sub-culture of executives and directors are often unable to objectively assess the individual performance of their fellow elites and how this culture designs its own norms, hierarchies, and behaviors.

It points out that in 2003, if a CEO would have made only $2.3 million the average pay for worker should have been $51,148 (estimate by Sklar, 2004.) But as CEOs got richer, more families were falling into poverty. Median income declined by about $600 in inflation-adjusted dollars, or 1.2 percent between 2001 and 2003, according to Census data. In fact, from the end of 2003 through March 2005, inflation- adjusted weekly earnings for the "production non-supervisory worker" (this includes 80 percent of the American workforce) actually declined by 0.9 percent (Bureau of Labor Statistics, 2005).

The report concludes, "As fair-minded people, Americans believe that there should be a correlation between the job well done and the reward. The trend in excessive CEO compensation reflects a culture of greed and a growing inequality that poses a threat to the viability of the American dream for many middle-class families. As a nation, we must move forward with a progressive vision that restores our values of hard work and fair play and insures that the promise of economic opportunity is extended to all."

Click here to view a copy of the report.