The 1980s, 1990s, and 2000s were prosperous times for top U.S. executives, especially relative to other wage earners and even relative to other very high wage earners (those earning more than 99.9 percent of all wage earners). Executives constitute a larger group of workers than is commonly recognized, and the extraordinary pay increases received by chief executive officers of large firms had spillover effects in pulling up the pay of other executives and managers.1 Consequently, the growth of CEO and executive compensation overall was a major factor driving the doubling of the income shares of the top 1.0 percent and top 0.1 percent of U.S. households from 1979 to 2007 (Bivens and Mishel 2013). Income growth since 2007 has also been very unbalanced as profits have reached record highs and, correspondingly, the stock market has boomed while the wages of most workers (and their families’ incomes) have declined over the recovery (Mishel et al. 2012; Mishel 2013). It is useful to track CEO compensation to assess how well this group is doing in the recovery, especially since this is an early indication of how well other top earners and high-income households are faring through 2013. This paper presents CEO compensation trends through 2013 and finds:
Trends in CEO compensation last year:
Average CEO compensation was $15.2 million in 2013, using a comprehensive measure of CEO pay that covers CEOs of the top 350 U.S. firms and includes the value of stock options exercised in a given year, up 2.8 percent since 2012 and 21.7 percent since 2010. Longer-term trends in CEO compensation:
From 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period. The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s. If Facebook, which we exclude from our data due to its outlier high compensation numbers, were included in the sample, average CEO pay was $24.8 million in 2013, and the CEO-to-worker compensation ratio was 510.7-to-1. CEO compensation relative to that of other high earners:
Over the last three decades, CEO compensation grew far faster than that of other highly paid workers, those earning more than 99.9 percent of other wage earners. CEO compensation in 2012 was 4.75 times greater than that of the top 0.1 percent of wage earners, a ratio 1.5 higher than the 3.25 ratio that prevailed over the 1947–1979 period (this wage gain is equivalent to the wages of 1.5 high wage earners).
Also over the last three decades, CEO compensation increased further relative to other very high wage earners than the wages of college graduates grew relative to those of high school graduates. That CEO pay grew far faster than pay of the top 0.1 percent of wage earners indicates that CEO compensation growth does not simply reflect the increased market value of highly paid professionals in a competitive market for skills (the “market for talent”) but reflects the presence of substantial rents embedded in executive pay (meaning CEO pay does not reflect greater productivity of executives). Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on output or employment.
The modern history of CEO compensation (starting in the 1960s) is as follows. Even though the stock market (as measured by the Dow Jones Industrial Average and S&P 500 Index and shown in Table 1) fell by roughly half between 1965 and 1978, CEO pay increased by 78.7 percent. Average worker pay saw relatively strong growth over that period (relative to subsequent periods, not relative to CEO pay or pay for others at the top of the wage distribution). Annual worker compensation grew by 19.5 percent from 1965 to 1978, only about a fourth as fast as CEO compensation growth over that period. CEO compensation grew strongly throughout the 1980s but exploded in the 1990s and peaked in 2000, increasing by more than 200 percent just between 1995 and 2000. Chief executive pay peaked at around $20 million in 2000, a growth of 1,279 percent from 1978. This increase even exceeded the growth of the booming stock market, the value of which increased 513 percent as measured by the S&P 500 or 439 percent as measured by the Dow Jones Industrial Average from 1978 to 2000. In stark contrast to both the stock market and CEO compensation growth, private-sector worker compensation increased just 1.4 percent over the same period.
The fall in the stock market in the early 2000s led to a substantial paring back of CEO compensation, but by 2007 (when the stock market had mostly recovered) CEO compensation returned close to its 2000 level. Figure A shows how CEO pay fluctuates in tandem with the stock market as measured by the S&P 500 Index, confirming that CEOs tend to cash in their options when stock prices are high. The financial crisis in 2008 and the accompanying stock market tumble knocked CEO compensation down by 44 percent by 2009. By 2013, the stock market had recouped all of the ground lost in the downturn and, not surprisingly, CEO compensation had also made a strong recovery. In 2013, average CEO compensation was $15.2 million, up 2.8 percent since 2012 and 21.7 percent since 2010. CEO compensation in 2013 remains below the peak earning years of 2000 and 2007 but, as we show below, remains far above the pay levels of the mid-1990s and much further above CEO compensation in preceding decades.
The alignment of CEO compensation to the ups and downs of the stock market casts doubt on an explanation of high and rising CEO pay as reflecting the escalating individual productivity of executives, either because of larger firms, technology, or other reasons. CEO compensation often grows strongly simply when the overall stock market rises and individual firm stock values rise along with it. This is a market phenomenon and not one of improved firm performance: Most CEO pay packages allow pay to rise whenever the firm’s stock value rises and permit CEOs to cash out stock options regardless of whether or not the rise in the firm’s stock value was exceptional relative to other comparable firms. Over the entire period from 1978 to 2013, CEO compensation increased about 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period. If we had included Facebook in our sample then CEO compensation would have risen 1,596 percent from 1978 to 2013.
It is interesting to note that growth in CEO pay in 2013 was not driven by large increases in pay for just a few executives or just those with the highest pay. Figure B shows the growth in CEO pay when compensation is ranked and computed by CEO compensation fifths. CEO compensation rose across the board, and in fact grew the most in the bottom fifth, which saw an 11.1 percent increase in CEO compensation since 2012.
This analysis makes clear that the economy is recovering for some Americans, but not for most. The stock market and corporate profits have rebounded following the Great Recession, but the labor market remains very sluggish. Those at the top of the income distribution, including many CEOs, are seeing a strong recovery while the average worker is still experiencing the detrimental effects of a stagnant labor market. Compensation for private-sector workers has fallen 1.3 percent since 2010 and remains at 2009 levels.
Trends in the CEO-to-worker compensation ratio Table 1 also presents the trend in the ratio of CEO-to-worker compensation to illustrate the increased divergence between CEO and worker pay over time. This overall ratio is computed in two steps. The first step is to construct, for each of the largest 350 firms, the ratio of the CEOs’ compensation to the annual compensation of workers in the key industry of the firm (data on the pay of workers in any particular firm are not available). The second step is to average that ratio across all the firms. The last column in Table 1 is the resulting ratio in select years. The trends prior to 1995 are based on the changes in average CEO and private-sector production/nonsupervisory worker compensation. The year-by-year trend is presented in Figure C.
CEO pay relative to that of other highly paid workers CEO compensation has grown a great deal, but so has pay of other high-wage earners. To some analysts this suggests that the dramatic rise in CEO compensation was driven largely by the demand for the skills of CEOs and other highly paid professionals. This interpretation, then, is that CEO compensation is being set by the market for “skills” and is taken as evidence that rising CEO compensation is not due to managerial power and rent-seeking behavior (Bebchuk and Fried 2004). One prominent example of the “it’s other professions, too” argument comes from Kaplan (2012a, 2012b). For instance, in the prestigious 2012 Martin Feldstein Lecture, Kaplan (2012a, 4) claimed:
Over the last twenty years, then, public company CEO pay relative to the top 0.1 percent has remained relatively constant or declined. These patterns are consistent with a competitive market for talent. They are less consistent with managerial power. Other top income groups, not subject to managerial power forces, have seen similar growth in pay.
And in a follow-up paper for the CATO Institute, published as a National Bureau of Economic Research (NBER) working paper, Kaplan (2012b, 21) expanded this point further:
The point of these comparisons is to confirm that while public company CEOs earn a great deal, they are not unique. Other groups with similar backgrounds—private company executives, corporate lawyers, hedge fund investors, private equity investors and others—have seen significant pay increases where there is a competitive market for talent and managerial power problems are absent. Again, if one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why these professional groups have had a similar or even higher growth in pay. It seems more likely that a meaningful portion of the increase in CEO pay has been driven by market forces as well.
Bivens and Mishel (2013) address the larger issue of the role of CEO compensation in generating income gains at the very top and conclude that there are substantial rents embedded in executive pay, meaning that CEO pay gains are not simply the result of a competitive market for talent. We draw on that analysis to show that CEO compensation grew far faster than compensation of other highly paid workers over the last few decades, which suggests that the market for skills was not responsible for the rapid growth of CEO compensation. To reach this finding we employ Kaplan’s own series on CEO compensation and compare it to the incomes of top households, as he does, but also compare it to a better standard, the wages of top wage earners.4 We update Kaplan’s series beyond 2010 using the growth of CEO compensation in our own series. This analysis finds, contrary to Kaplan, that compensation of CEOs has far outpaced that of very highly paid workers, the top 0.1 percent of earners.
Table 2 presents the ratio of the average compensation of chief executive officers of large firms, the series developed by Kaplan, to two benchmarks. The first benchmark is the one Kaplan employs, the average household income of those in the top 0.1 percent developed by Piketty and Saez (2012). The second is the average annual earnings of the top 0.1 percent of wage earners based on a series developed by Kopczuk, Saez, and Song (2010) and updated in Mishel et al. (2012). Each ratio is presented as a simple ratio and logged (to convert to a “premium,” the relative pay differential between one group and another). The wage benchmark seems the most appropriate one since it avoids issues of household demographics—changes in two-earner couples, for instance—and limits the income to labor income (excluding capital income). Both the ratios and log ratios clearly understate the relative wage of CEOs since executive pay is a nontrivial share of the denominator, a bias that has probably grown over time simply because CEO relative pay has grown.5 For comparison purposes Table 2 also shows the changes in the gross (not regression-adjusted) college-to-high-school wage premium. The comparisons end in 2012 because 2013 data for top 0.1 percent wages are not yet available.
CEO compensation grew from 1.14 times the income of the top 0.1 percent of households in 1989 to 1.85 times top 0.1 percent household income in 2012. CEO pay relative to pay of top 0.1 percent wage earners grew even more, from a ratio of 2.68 in 1989 to 4.75 in 2012, a rise (2.07) equal to the pay of more than two very high earners. The log ratio of CEO relative pay grew 49 log points from 1989 to 2012 using top 0.1 percent household incomes as the comparison, and by 57 log points relative to top 0.1 percent wage earners.
Is this a large increase? Kaplan (2012a, 4) concluded that CEO relative pay “has remained relatively constant or declined.” Kaplan (2012b, 14) finds that the ratio “remains above its historical average and the level in the mid-1980s.” Figure D puts this in historical context by presenting the ratios displayed in Table 2 back to 1947. The ratio of CEO pay to top (0.1 percent) household incomes in 2012 (1.85) was two-thirds higher than the historical (1947–1979) average of 1.11. The ratio of CEO pay relative to top wage earners in 2012 was 4.75, 1.5 higher than the historical average of 3.25 (a relative gain of the wages earned by 1.5 high wage earners). As the data in Table 2 show, the increase in the logged CEO pay premium since 1979, and particularly since 1989, far exceeded the rise in the college-to-high-school wage premium which is widely and appropriately considered substantial growth. The data would show an even faster growth of CEO relative pay if Kaplan had built his historical series using the Frydman and Saks (2010) series for the 1980–1994 period rather than the Hall and Leibman (1997) data.6
Presumably, CEO relative pay has grown further since 2012. As Table 1 showed, between 2012 and 2013, CEO compensation rose 2.8 percent. (Unfortunately, data on the earnings of top wage earners for 2013 are not yet available for a comparison to CEO compensation trends.) If CEO pay growing far faster than that of other high earners is a test of the presence of rents, as Kaplan has suggested, then we would conclude that today’s executives receive substantial rents, meaning that if they were paid less there would be no loss of productivity or output. The large discrepancy between the pay of CEOs and other very high wage earners also casts doubt on the claim that CEOs are being paid these extraordinary amounts because of their special skills. What skills are present that are so discontinuous that they jump such a significant amount at and even beyond the point one earns more than 99.9 percent of all earners? The distribution of skills, as reflected in the rest of the wage distribution, tends to be much more continuous.
Conclusion
It is sometimes thought that the rise of CEO compensation is a symbolic issue and does not have consequences for the vast majority. However, escalating CEO compensation and, correspondingly, executive compensation more generally, have fueled the growth of top 1.0 percent incomes. Bivens and Mishel (2013) note:
In a study of tax returns from 1979 to 2005, Bakija et al. (2010) show the trend in the shares of total income of U.S. households accruing to the top 1.0 and top 0.1 percent of households. They establish that the increases in income at the top were disproportionately driven by households headed by someone who was either an “executive” (including managers and supervisors and hereafter referred to as executives) in nonfinancial sectors or in the financial sector as an executive or other worker. Households headed by a non-finance executive were associated with 44 percent of the growth of the top 0.1 percent’s income share and 36 percent in the growth among the top 1.0 percent. Those in the financial sector were associated with nearly a fourth (23 percent) of the expansion of the income shares of both the top 1.0 and top 0.1 percent. Together, finance and executives accounted for 58 percent of the expansion of income for the top 1.0 percent of households and an even greater two-thirds share (67 percent) of the income growth of the top 0.1 percent of households. Relative to others in the top 1 percent, households headed by executives had roughly average income growth, those headed by someone in the financial sector had above average income growth and the remaining households (non-executive, non-finance) had slower than average income growth. In our view this analysis of household income data understates the role of executives and the financial sector since they do not account for the increased spousal income from these sources.
We have argued above that high CEO pay reflects “rents,” meaning it does not indicate a growth of executives’ individual contribution to raising output. Consequently, CEO pay could be reduced and the economy would not suffer any loss of output. Another implication of rising executive pay is that it reflects income that otherwise would have accrued to others in the economy: What the executives earned was not available for broader-based wage growth for other workers. Bivens and Mishel (2013) explore this issue in depth.
There are policies that can be used to curtail escalating executive pay and broaden wage growth for the majority of workers. Some involve taxes. Implementing higher marginal income tax rates at the very top would limit “rent-seeking” behavior and reduce the incentives for executives to push for such high pay. Legislation has also been proposed that removes the tax break for executive performance pay that was established early in the Clinton administration: By allowing the deductibility of performance pay, this tax change helped fuel the growth of stock options and other performance pay.7 Another option is to set corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation, as is being proposed in California.8
Other policies that can potentially limit executive pay growth are changes in corporate governance, such as greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.
About the authors
Lawrence Mishel, a nationally recognized economist, has been president of the Economic Policy Institute since 2002. Prior to that he was EPI’s first research director (starting in 1987) and later became vice president. He is the co-author of all 12 editions of The State of Working America. He holds a Ph.D. in economics from the University of Wisconsin at Madison, and his articles have appeared in a variety of academic and non-academic journals. His areas of research are labor economics, wage and income distribution, industrial relations, productivity growth, and the economics of education.
Alyssa Davis joined EPI in 2013 as the Bernard and Audre Rapoport Fellow. She assists EPI’s researchers in their ongoing analysis of the labor force, labor standards, and other aspects of the economy. Alyssa aids in the design and execution of research projects in areas such as poverty, education, health care, and immigration. She also works with the Economic Analysis and Research Network (EARN) to provide research support to various state advocacy organizations. Alyssa has previously worked in the Texas House of Representatives and the U.S. Senate. She holds a B.A. from the University of Texas at Austin.
Endnotes
1. In 2007, according to the Capital IQ database, there were 38,824 executives in publicly held firms (tabulations kindly provided by Temple University professor Steve Balsam). There were 9,692 in the top 0.1 percent of wage earners.
2. The years chosen are based on data availability, though where possible we chose cyclical peaks (years of low unemployment).
3. For instance, all of the papers prepared for the symposium on the top 1.0 percent, published in the Journal of Economic Perspectives (summer 2013), used CEO pay measures with realized options. Bivens and Mishel (2013) follow this approach because the editors asked them to drop references to the options-granted measure.
4. We appreciate Steve Kaplan sharing his series with us.
5. Temple University professor Steve Balsam kindly provided tabulations of annual W-2 wages of executives in the top 0.1 percent from the Capital IQ database. The 9,692 executives in publicly owned firms who were in the top 0.1 percent of wage earners had average W-2 earnings of $4,400,028. Using Mishel et al. (2012) estimates of top 0.1 percent wages, executive wages make up 13.3 percent of total top 0.1 percent wages. One can gauge the bias of including executives in the denominator by noting that the ratio of executive wages to all top 0.1 percent wages in 2007 was 2.14, but the ratio of executive wages to non-executive wages was 2.32. Unfortunately, we do not have data that permit an assessment of the bias in 1979 or 1989. We also do not have information on the number and wages of executives in privately held firms; their inclusion would clearly indicate an even larger bias. The IRS reports there were nearly 15,000 corporate tax returns in 2007 of firms with assets exceeding $250 million, indicating there are many more executives of large firms than just those in publicly held firms.
6. Kaplan (2012b, 14) notes that the Frydman and Saks series grew 289 percent, while the Hall and Leibman series grew 209 percent. He also notes that the Frydman and Saks series grows faster than that reported by Murphy (2012).
7. U.S. Sens. Jack Reed (D-R.I.) and Richard Blumenthal (D-Conn.) introduced legislation in 2013, Stop Subsidizing Multimillion Dollar Corporate Bonuses Act (S.1476), which would limit the tax deductibility of performance pay. Balsam (2013) estimates that between 2007 and 2010 alone, taxpayers subsidized more than $30 billion in executive performance pay because of the loophole.
8. See Reich (2014).
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