It was good to be a head honcho in 1978, when CEOs made 26 times as much as their nonsupervisory employees.

In 2015, it's much better.

CEOs make 257 to almost 300 times what lower-level employees get.

Ask a board of executives why it gave its CEO a raise, and at least part of the justification probably goes something like this: We did it to be competitive. We benchmarked it against our peers.

Benchmarking pay rates against perceived peers has become ubiquitous among publicly traded companies, such as PPG Industries, Mylan and Consol Energy, whose CEOs each made more than $15 million in 2013.

The IRS promotes benchmarking as a “best practice” to keep nonprofits' pay in check.

Officials used the standard in December to justify 4 percent raises for executives at the University of Pittsburgh. Some high-profile public offices use the method, too.

Allegheny County officials used marketplace competition to justify a 38 percent salary increase for the Airport Authority's new CEO, Christina Cassotis, who is about to become the highest-paid county-affiliated employee at $295,000.

But mounting research warns against relying too heavily on benchmarking to set executive pay.

“At some point, the acceleration has got to stop,” said Charles Elson, director of the University of Delaware's John L. Weinberg Center for Corporate Governance. “It's a real disincentive to everyone else who works within an organization.”

The so-called best practice is a major driver in the rapidly growing gap between what CEOs and average workers make, just as data show executive pay hikes often do not reflect company performance or have meaningful connections to internal pay schedules for the rest of employees, Elson said.

“We need to revisit the entire benchmarking procedure,” he said.

Peer pressure

Elson's research found benchmarking presents two major flaws: CEO skills are not as transferable as most companies think, and benchmarking has an “obvious upward bias” that “only ratchets up pay” across the board.

Nobody wants to have the lowest-paid CEO, so boards tend to set compensation at the 50th percentile of the median among peers or higher, Elson and others said. Companies frequently include higher-paid peers at larger companies within their benchmarking groups.

“Benchmarking feeds upon itself,” said Rick Pierchalski, who has worked in the securities industry for 30 years and founded Medallion Wealth Management, a financial services firm in Sewickley.

“I'm not one who rides this wave of ‘income inequality,' but I don't know how these boards of directors are permitting this to happen.”

Average CEO pay at the 350 biggest American companies exploded in the 1990s and peaked in 2000 at $20 million — a 1,279 percent increase from 1978, Economic Policy Institute data show. Average worker pay climbed just 1.4 percent during that period.

Those CEOs made an average of $15.2 million in 2014 — 296 times what typical workers got, the EPI report found.

A separate look into Fortune 500 companies by the Associated Press and data firm Equilar in 2014 pegged the CEO ratio at 257 times the national average for workers as a whole, up from 180 times in 2009. That analysis cited “peer pressure” as a key factor in why CEO pay has skyrocketed while the paychecks of average workers “barely budged.”

“It is increasingly apparent that the pay awarded to chief executives is becoming profoundly detached from not just the pay of the average worker, but also from the companies they run,” a 2012 report by Elson and co-author Craig Ferrere concluded.

Sanity check

Shareholders have rewarded CEOs with lavish pay even while their stock prices plummeted, or while their lower-level workers took pay cuts, furlough days and buyouts.

“The real problem is with the line staff; often they're not paid enough,” said Ken Berger, CEO of Charity Navigator, a nonprofit watchdog group. “They're the ones who are most likely to go first because management is making the decisions and has a certain level of self-preservation and relationships with the board.”

Companies that hire compensation consultants — another tool billed as a check on pay — showed a 7.5 percent increase in CEO pay compared to other firms, with higher pay increases when a compensation committee was controlled by a manager over a board, a 2014 study by University of Cambridge researchers found.

Equilar, a Northern California-based data firm specializing in executive compensation, developed its own tool, Market Peers, aimed at helping companies identify peer groups more accurately to avoid “cherry-picking” inappropriate peers.

“Benchmarking as a tool for setting pay has its place,” said Aaron Boyd, Equilar's director of governance research. “A lot of companies use it as a sanity check.”

He noted that CEOs make more money than 30 years ago partly because companies are much larger and more complex.

“If you're making $50,000 a year, it's hard to understand why a CEO should be making $10 million instead of $8 million, but we're looking at billion-dollar companies,” Boyd said.

Required disclosure

A HuffPost/Yougov poll in 2014 found two-thirds of Americans think top corporate executives and CEOs get paid too much. The findings held true even when looking only at survey respondents whose household incomes exceeded $100,000 a year.

Americans tend to underestimate drastically how much the nation's top bosses are raking in. A Harvard Business School study released in September found most people believe CEOs make 30 times what the average worker makes.

“We could cut every salary in half and lose the talent” that contributes to the effectiveness of an agency, and in some cases pumps money directly into government accounts, such as airport revenue, Allegheny County Executive Rich Fitzgerald said.

“We don't have stock options that can be exercised like a publicly traded company, so it's almost on a case-by-case basis,” Fitzgerald said. “Each board tries to weigh what they think is a responsible use of the tax dollars, and also to be competitive.”

The Securities and Exchange Commission is implementing a rule this year that requires publicly traded companies to disclose the ratio of CEO-to-worker pay. That could spur closer scrutiny over executive compensation nationwide.

“You can always find a justification for a pay raise,” Boyd said. “But the companies that do use their resources the best, they're generally the most successful.”

Natasha Lindstrom is a Trib Total Media staff writer. Reach her at 412-380-8514 or nlindstrom@tribweb.com.

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