2021 should have been a banner year for American workers. Gross Domestic Product soared at a 5.7% annual rate, "the strongest pace since 1984." The unemployment rate dipped below 4%. And wages and salaries increased by 4.5%, "the fastest increase since 1983." 

So why are so many workers still sour on the U.S. economy, with nearly 80% of Americans rating the economy "poor" or "only fair"? One reason, of course, is inflation. While wages increased 4.5%, "for the median household, prices rose 6.7 percent from the end of 2020 to the end of 2021." 

But a new report from the Institute of Policy Studies (IPS) reveals that corporations could have increased wages more substantially. Instead, many corporations chose to spend resources on large increases in CEO pay. Corporations also spent billions on stock buybacks, benefiting CEOs and other executives whose compensation is tied to stock prices. 

The IPS report looked at 300 publicly traded companies with the lowest median wages. This group is comprised of many of America's largest employers, including Walmart, McDonald's, and Coca-Cola. CEO pay at these companies increased by an average of $2.5 million, to $10.6 million. Meanwhile, average worker pay increased by just $3,556 to an average of $23,968. The report found that, at 106 of these companies, wage increases did not keep pace with inflation. Many of these employees are hovering around the poverty line and well below a living wage. 

Among the 106 companies with wages that did not keep pace with inflation, 67 "spent resources buying back their own stock, a maneuver that inflates executive stock-based pay." These companies collectively spent $43.7 billion on share repurchases. Lowes, for example, spent $13 billion on stock buybacks in 2021. With those funds "the company could have given each of its 325,000 employees a $40,000 raise." Instead, "median pay at the company fell 7.6 percent to $22,697." The CEO of Lowes, Marvin Ellison, was paid $17.9 million in 2021. That is 787 times more than the average Lowes employee. 

Among all 300 companies, the ratio of CEO pay to the median worker is "670-to-1, up from 604-to-1 in 2020." At 49 of the companies, the ratio of CEO pay to the median worker exceeds 1,000-to-1. In 2021, Amazon's new CEO, Andy Jassy, was paid more than $212 million. That is 6,474 times more than the take-home pay of the typical Amazon worker. 

So why are workers down on the economy? Their labor is generating an extraordinary amount of wealth. But the lion's share of that wealth is flowing to top executives and investors. Millions of workers with full-time employment are left struggling to make ends meet. 

With low unemployment and a growing economy, "2021 should have been a year of great opportunity to move towards greater pay equity," Sarah Anderson, the lead author of the IPS report, told Popular Information. "And yet, we didn't see that big leap forward — we still saw companies fixating on how to inflate CEO pay."

It wasn't always this way

A new book by New York Times reporter David Gelles explains that corporate America didn't always operate this way. The data in the IPS report is a reflection of a new way of doing business pioneered by former GE CEO Jack Welch. Gelles laid out his core argument in a recent interview:

For decades after World War II, big American companies bent over backward to distribute their profits widely. In General Electric’s 1953 annual report, the company proudly talked about how much it was paying its workers, how its suppliers were benefiting and even how much it paid the government in taxes.

That changed with the ascendance of men like Jack Welch, who took over as chief executive of G.E. in 1981 and ran the company for the next two decades. Under Welch, G.E. unleashed a wave of mass layoffs and factory closures that other companies followed. The trend helped destabilize the American middle class. Profits began flowing not back to workers in the form of higher wages, but to big investors in the form of stock buybacks. And G.E. began doing everything it could to pay as little in taxes as possible.

Gelles argues that, in the long run, neglecting workers and using gimmicks to boost profits and share prices backfires. Welch transformed GE from an industrial company to one that derived much of its profits from financial machinations. It worked for a while but GE struggled mightily following Welch's retirement in 2001. 

Gelles notes that for the "past 40-plus years we’ve been living in this era of shareholder primacy" and "the gap between worker pay and productivity kept growing wider." Gelles argues "companies can be competitive and profitable while also taking great care of their workers." This is backed up by data. A Harvard Business School study found "companies with overpaid CEOs and underpaid workers see significantly higher levels of employee dissatisfaction and turnover, as well as lower sales."

He says the government should explore policies that "get companies to pay a living wage, invest in their people and stop this race to the bottom with corporate taxes."

The path to a more equitable economy

What are policies that could allow workers to capture more of their economic value? Biden could immediately use "executive action to give corporations with narrow pay ratios preferential treatment in government contracting." Biden took a similar step earlier in his presidency when he "set a $15 per hour minimum wage" for certain firms seeking federal contracts. 

In this case, Biden could "grant preferential treatment in contracting to firms with pay ratios of 100-to-1 or less." This is an incremental step that could have a big impact. Of the 300 firms studied by IPS, 119 had received federal contracts over the last 3 years. Those contracts had a combined value of $37.2 billion.

But only 6 of the 119 companies with government contracts had a pay ratio between CEOs and the median worker of 100-to-1 or less. TE Connectivity, for example, has a "$3.3 billion in recent federal contracts for manufacturing electronic sensors and connectors." But TE Connectivity's CEO makes $14.7 million and its median worker makes less than $25,000 annually — a pay ratio is 587-to-1. Last year, the company's median wage increased only 0.2%. It has been able to keep labor costs low by offshoring an increasing percentage of its employees. But if the renewal of the contract was jeopardized by its high pay ratio, TE Connectivity would be incentivized to increase worker pay, reduce CEO pay, and hire more American workers.