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Why Your CEO Makes 300 Times Your Salary -- and How That Impacts You

Susannah Snider
Thinkstock

A lot has changed in corporate America since the 1970s. Typewriters are out. Social media is in. And top executives earn more money -- much, much, much more money.

From 1978 to 2014, CEO compensation surged a staggering 997 percent, adjusted for inflation, according to the Economic Policy Institute. Over the same period, typical workers saw compensation grow a modest 10.9 percent. In 1978, CEOs took home about 30 times what the average worker made. In 2014, they earned about 300 times more, according to EPI.

Of course, it's easy to get caught up in the "Well, that isn't fair" reaction to runaway executive pay. But the ramifications of this pay gap go deeper than that. On one hand, some may see it as indication that they're getting highly competent -- and therefore highly paid -- talent in the corner office. "I know many people are outraged when they see the size of CEO pay," says Andrew Chamberlain, chief economist at Glassdoor, a jobs and recruiting site. "But once you understand what's going on, it's not as unreasonable."

Other experts disagree. If you think high compensation is the price you pay for talent, "you have drunk the Kool-Aid," wrote Roger L. Martin, strategist, advisor, author and institute director of the Martin Prosperity Institute at the University of Toronto's Rotman School of Management, in an email. High CEO compensation "doesn't bring talent. It brings people who care first about their own compensation, not about making it a great company."

Whether you fall to one extreme or somewhere in the middle, here's what to know about why your boss's boss's boss's boss makes hundreds of times your salary -- and what that means for you.

Their paycheck is probably structured differently than yours. If you're a typical office worker, the bulk of your earnings likely comes from taking home a steady paycheck each month. But that's not necessarily how your CEO's compensation package looks. His income -- and, yes, it's probably a man -- may include a salary, bonuses and stock options, among other forms of compensation. While "there's a constellation of factors" contributing to larger-than-life CEO pay, experts point to one trend in particular: the rise of stock-based compensation.

In general, the idea behind compensating with company shares, which rise and fall with the projected value of the business, is to tie CEO pay to performance. If the company does well, the logic goes, the CEO is rewarded. And if the company has a bad year, the CEO's bank account also takes a hit. But, Martin writes, compensating with company shares creates "a largely uncapped upside for executives." CEOs tend to do fine, even when the company is doing poorly, even when they're laying off workers or cutting pay. These stock-based earnings are typically taxed more favorably than regular income, another reason they've gained such popularity.

They may not think twice about layoffs. Experts worry that paying for performance aligns a CEO's priorities with the needs of the shareholders, not with their underlings' concerns. If, after a bad quarter, the CEO feels pressured to cut jobs to prove that he values productivity, then he will. "It's a spectacular downside," Martin writes. "Stock-based compensation is nothing more or less than an incentive for the CEO to increase expectations about future performance (not increase future performance) and anything that accomplishes the goal is fair game -- including massive layoffs."

They may be incredibly nearsighted. Instead of valuing the long-term success of your company, an executive whose earnings fluctuate based on quarterly and annual metrics may focus on short-term goals, ignoring concerns about a company's long-term heath, sustainability or drive toward innovation, says Susan Holmberg, a fellow and the director of research at the Roosevelt Institute, an economic policy think tank in New York City. "It's really unsettling to think about how this system has created this paradigm of short-termism," she says, pointing out that it may also encourage fraud among executives.

What can you do? As an individual worker, unfortunately, there's not much you can do to knock your own CEO's pay down from stratospheric levels. You can vote with your feet, opting to work for smaller companies with more down-to-earth executive pay. By law, publicly traded companies make that information available, so you can investigate those organizations before submitting your W-2s. Or you can start your own business and become your own chief executive officer, Holmberg says.

Outside of that, any major changes will likely have to be made at the policy level, experts say. One shift that's coming down the pike: a rule requiring public companies to reveal executive-to-worker pay ratios by early 2017. That transparency may bring about change. After all, writes U.S. News writer Susan Milligan: "How can a CEO earning 300 times the average worker at his or her company complain that raising the minimum wage is going to cripple the company and force layoffs?"



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