How to fix unfair CEO pay system: AFL-CIO president

CEOs new 'royalty' in America: Richard Trumka

Shareholders should be given the power to decide CEO pay to fix a system that leads to outsized executive compensation, AFL-CIO President Richard Trumka said Wednesday.

"Shareholders don't get to decide what CEOs make. There's a compensation committee that does that. When the shareholders vote, you know it's only advisory," the head of the country's largest labor federation said on CNBC's "Squawk Box." "We've had vote after vote where they've said, 'Cut the pay,' and management has just ignored that."

Average pay for chief executives of companies grew to $13.5 million in 2014 (Tweet This), representing a 15.6 percent increase from the previous year, according to a report released Wednesday by the union.

It said the ratio of CEO pay to worker compensation expanded to 373 to 1, up from 331 to 1 in 2013. Chief executives made about 40 times as much as their employees 35 years ago, the AFL-CIO said.

"Workers in this country are struggling," Trumka said. "They're barely getting by, and CEOs—the new royalty in this country—got a 16 percent pay increase last year."

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The AFL-CIO singled out Wal-Mart, saying CEO Doug McMillon's hourly pay is 810 times what the average worker employed by the company made last year. McMillon made $19.4 million in 2014, according to the AFL-CIO.

Trumka said the pay disparity is bad for morale. He invoked comments from management guru Peter Drucker, who has said CEOs should only make about 20 times what their workers make.

Wal-Mart is the nation's largest private employer and has a global workforce of 2.2 million employees. It is also one of the only top companies that discloses its worker pay, which allows researchers to make a direct CEO-to-worker pay comparison.

Asked about the AFL-CIO's analysis, Wal-Mart spokesman Randy Hargrove told CNBC it did not add up to an "apples to apples" comparison. He noted that 75 percent of McMillon's compensation is performance based, and $14.5 million of his total pay has not yet been earned or paid out, and would only be realized if the company meets performance goals over the next three years.

He added that McMillon's pay was down 24 percent from 2013.

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In February, the retailer said it would raise wages for half a million hourly employees to $9 an hour, or $1.75 above the federal minimum wage. It committed to further raising hourly pay to $10 an hour by February.

The initiative amounts to a $1 billion investment in Wal-Mart's workforce, Hargrove said, adding that it would not just impact low-income employees, but increase the pay bands for workers who had hit a compensation limit.

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Earlier on "Squawk Box," Home Depot co-founder Ken Langone said "truly independent" boards of directors are necessary if the market, rather than government, is going to distribute higher pay to workers. However, he noted that you could not pay enough for an outstanding manager such as former General Electric Chairman and CEO Jack Welch or Larry Bossidy, former AlliedSignal chairman and chief executive.

Langone also criticized teachers unions for opposing measures that would inject competition among educators into the system, which he said would produce better outcomes for students.

"Look at the advent of the teachers unions in public education and then look at the results that we're driving out of public education," he said.

Trumka said competition among teachers was only one variable affecting American education, and he asserted that public schools are underfunded, leading to conditions that hold back students.

—CNBC's Toby Taylor contributed reporting to this story.