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Related topics: stocks, Viacom, Oracle, Whole Foods Market, Michael Brush

CEOs got a whopping 24% pay hike last year as corporate profits soared with the recession's end, more than making up for two years of declining pay.

The average worker? Not so much. Those lucky enough to still have jobs saw their pay inch up a meager 3.3%, which might have been enough to cover the rising prices of gas and food.

That difference in raises for CEOs and working stiffs is the latest turn in a trend that's been nagging CEO pay critics for years. That's the ever-widening gap between those at the top and their underlings, which is creating a superelite in the U.S. -- and not helping investors or the economy.

Consider these gaps between some of the highest-paid CEOs of 2010 and workers in their industries:

  • At Viacom (VIA.B, news), CEO Philippe Dauman got an impressive $84.5 million last year, or 1,990 times what the typical Viacom worker got. This assumes his workers make the $42,500 a year, on average, reported by the Bureau of Labor Statistics as the typical pay for employees in arts, design, entertainment, sports and media.
  • Larry Ellison, the CEO of Oracle (ORCL, news), got similarly regal pay of $70 million last year. That was 750 times the $93,470 earned in 2010, on average, by computer software engineers, according to the BLS. Ellison, unlike a lot of CEOs, actually took a pay cut last year, but he still pulled down $1.35 million per week -- a sum it would take the typical computer software engineer more than 14 years to earn.
  • John Hammergren, the CEO of drug company McKesson (MCK, news), was paid $54.4 million last year. That works out to $210,000 a day, assuming a normal workweek. That's almost three times the $74,590 that a medical scientist earns in a full year, according to the BLS. Hammergren's 2010 pay was 732 times the average pay for those workers.

image: Michael Brush

Michael Brush

Overall, CEOs at S&P 500 companies were paid $11.4 million on average last year, up from $9.2 million the year before, according to the AFL-CIO. In contrast, average workers saw their annual pay go up to $33,121, from $32,049 in 2009, according to the Institute for Policy Studies, a think tank. So the pay gap of CEOs over workers shot up 20% last year, to 344 times an average worker's pay from 287 times.

Back in the 1980s, this pay gap was just 40.

The problem with all this? It's bad for business and bad for shareholders, a lot of business experts say.

Pay gap details are due

To be fair to the CEOs I've listed, you can find many just-as-stark comparisons between CEO and average-worker paychecks at the AFL-CIO executive pay watch website. And those I named might pay their workers more than the average rate. But they aren't saying. The companies mentioned in this article declined to offer specific numbers for their workers instead of the industry average.

The Dodd-Frank financial reforms approved last year will require companies to give investors specific data on the salaries of executives versus those of typical workers. But regulations for that part of the law are just now being considered, and a lot of companies are fighting the release of these specifics.

Viacom did respond that about $54 million of the $84.5 million Dauman earned was a one-off payment linked to a long-term renewal of his employment contract. The company says that more than 80% of his pay is in long-term equity awards aligning his interests with those of shareholders, and that Viacom stock was up 33% last year compared with a 13% gain for the Standard & Poor's 500 Index ($INX).

How the gap is bad for business

Let's take a closer look at some of the problems this growing pay gap represents:

  • One big one is that the gains in corporate profits last year that were used to justify those huge CEO pay hikes often came at the expense of workers. Profits soared in large part because of layoffs during the recession.
  • Another is simply the sense of unfairness created by the widening gap in CEO pay compared with pay for regular workers. Everyone tightened belts during the recession; everyone worked harder. Why do only executives see a payoff? "People just find this outrageous and unfair, that certain people would be valued so much more than others," says Sarah Anderson of the Institute for Policy Studies.
  • Perhaps more important, there's a solid argument that these kinds of huge pay gaps are bad for the economy, say Anderson and other pay critics. One of the founders of modern management science, Peter Drucker, suggested the maximum ratio between top management pay and worker pay should be no greater than about 25-to-1. Any more than that and it's "difficult to foster the kind of teamwork and trust that businesses need to succeed," says Rick Wartzman, the executive director of the Drucker Institute.

To put it another way, when the pay gap is too wide, employee morale and productivity decline, says Brandon Rees, deputy director of the AFL-CIO Office of Investment. Plus, turnover can increase, which is also bad for business. A big part of the problem is that when rank and file pay levels are too low compared with the pay at the top, workers no longer feel like stakeholders in a company. Not only do academic research and analysis by the Brookings Institution bear this out, but we can see it in the real world.

The case of Whole Foods

Though Whole Foods Market (WFM, news) has made exceptions for recently promoted executives, the grocery store chain generally limits the pay ratio between regular workers and top executives to 19. It also gives stock options to workers after three years on the job. Less than 10% of options has gone to executives.

"We have a very egalitarian culture," says Mark Ehrnstein, a Whole Foods vice president. "We believe that when companies have that huge disparity in pay, it creates corrosiveness between leadership and team members. Our focus on creating an egalitarian culture absolutely contributes to the well-being of our company."