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CEO compensation has grown 940% since 1978Typical worker compensation has risen only 12% during that time

Posted by Jerrald J President on August 29, 2019 at 11:25 AM

https://www.epi.org/publication/ceo-compensation-2018/Http://www.jerraldpresident.info//


This is not a Right or Left creation, this is what Capitalism produced. Until we realize the system was created by the very same people who told you" all men are created equal" yet owned my ancestors and denied their own mothers and daughters the right vote! Gangster-ism 101.... By JJP


  CEO compensation has grown 940% since 1978Typical worker compensation has risen only 12% during that time


 


Summary


What this report finds: The increased focus on growing inequality has led to an increased focus on CEO pay. Corporate boards running America’s largest public firms are giving top executives outsize compensation packages. Average pay of CEOs at the top 350 firms in 2018 was $17.2 million—or $14.0 million using a more conservative measure. (Stock options make up a big part of CEO pay packages, and the conservative measure values the options when granted, versus when cashed in, or “realized.”;) CEO compensation is very high relative to typical worker compensation (by a ratio of 278-to-1 or 221-to-1). In contrast, the CEO-to-typical-worker compensation ratio (options realized) was 20-to-1 in 1965 and 58-to-1 in 1989. CEOs are even making a lot more—about five times as much—as other earners in the top 0.1%. From 1978 to 2018, CEO compensation grew by 1,007.5% (940.3% under the options-realized measure), far outstripping S&P stock market growth (706.7%) and the wage growth of very high earners (339.2%). In contrast, wages for the typical worker grew by just 11.9%.


Why it matters: Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. CEOs are getting more because of their power to set pay, not because they are increasing productivity or possess specific, high-demand skills. This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or taxed more).


How we can solve the problem: We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so. Such policies could include reinstating higher marginal income tax rates at the very top; setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation; establishing a luxury tax on compensation such that for every dollar in compensation over a set cap, a firm must pay a dollar in taxes; reforming corporate governance to give other stakeholders better tools to exercise countervailing power against CEOs’ pay demands; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

Introduction and key findings


Chief executive officers (CEOs) of the largest firms in the U.S. earn far more today than they did in the mid-1990s and many times what they earned in the 1960s or late 1970s. They also earn far more than the typical worker, and their pay has grown much more rapidly. Importantly, rising CEO pay does not reflect rising value of skills, but rather CEOs’ use of their power to set their own pay. And this growing power at the top has been driving the growth of inequality in our country.

About the CEO pay series and this report


This report is part of an ongoing series of annual reports monitoring trends in CEO compensation. In this report, we examine current trends to determine how CEOs are faring compared with typical workers (through 2018) and compared with workers in the top 0.1% (through 2017). We also look at the relationship between CEO pay and the stock market.


To analyze current trends, we use two measures of compensation. The first measure includes stock options realized (in addition to salary, bonuses, restricted stock awards, and long-term incentive payouts). Because stock-options-realized compensation tends to fluctuate with the stock market (as people tend to cash in their stock options when it is most advantageous to do so), we also look at another measure of CEO compensation, to get a more complete picture of trends in CEO compensation. This measure tracks the value of stock options granted (in addition to salary, bonuses, restricted stock awards, and long-term incentive payouts).1

Trends over the past two years


Using the measure that includes stock options realized, we find that CEO pay fell by 0.5% from 2017 to 2018, to $17.2 million on average in 2018. CEO compensation using another measure, which captures the value of stock options granted (whether exercised or not), grew last year by 9.9% to $14.0 million. Both measures show strong growth in CEO compensation over the last two years, up 7.1 and 9.2%, respectively, for compensation measured with options exercised and options granted. Compensation grew strongly because of increasingly large stock awards given to CEOs; these stock awards averaged $7.5 million in 2018, making up nearly half of CEO compensation.

Long-term trends


CEO compensation has grown 52.6% in the recovery since 2009 using the options-exercised measure and 29.4% using the options-granted measure. In contrast, the typical workers in these large firms saw their annual compensation grow by just 5.3% over the recovery and actually fall by 0.2% between 2017 and 2018.


Average CEO compensation attained its peak in 2000, at the height of the late 1990s tech stock bubble, at $21.5 million (in 2018 dollars) based on either measure—368 or 386 times the pay of the typical worker, depending upon the measure used.2 CEO compensation fell in the early 2000s after the stock market bubble burst, but mostly recovered by 2007, at least for the measure using exercised stock options (the measure using options granted remained substantially below the 2000 level). CEO compensation fell again during the financial crash of 2008–2009 and rose strongly over the recovery since 2009 but still remains below the 2000 peak levels. CEO compensation continues to be dramatically higher than it was in the decades before the turn of the millennium. CEO compensation was 940.3% higher in 2018 than in 1978 using the options-exercised measure and 1,007.5% higher using the options-granted measure. Correspondingly, the CEO-to-average-worker pay ratio, using the options-exercised measure, was 121-to-1 in 1995, 58-to-1 in 1989, 30-to-1 in 1978, and 20-to-1 in 1965.

The relationship between CEO pay and the stock market


CEO pay has historically been closely associated with the health of the stock market, although this connection loosened over the last few years when CEO compensation did not correspond to rapid stock price growth. The generally tight link between stock prices and CEO compensation indicates that CEO pay is not being established by a “market for talent,” as pay surged with the overall rise in profits and stocks, not with the better performance of a CEO’s particular firm relative to that firm’s competitors.

The relationship between CEO pay and the pay of other top earners; the rise of inequality


Amid a healthy recovery on Wall Street following the Great Recession, CEOs enjoyed outsized income gains even relative to other very-high-wage earners (those in the top 0.1%); CEOs of large firms earned 5.4 times that of the average top 0.1% earner in 2017, up from 4.4 times in 2007. This is yet another indicator that CEO pay is more likely based on CEOs’ power to set their own pay, not on a market for talent.


To be clear, these other very-high-wage earners aren’t suffering: Their earnings grew 339.2% between 1978 and 2017. CEO pay growth has had spillover effects, pulling up the pay of other executives and managers, who constitute more than 40% of all top 1.0% and 0.1% earners.3 Consequently, the growth of CEO and executive compensation overall was a major factor driving the doubling of the income shares of the top 1% and top 0.1% of U.S. households from 1979 to 2007 (Bakija, Cole, and Heim 2012; Bivens and Mishel 2013). Income growth has remained unbalanced. As profits and stock market prices have reached record highs, the wages of most workers have grown very little, including in the current recovery (Bivens et al. 2014; Gould 2019).

Key findings


The report’s main findings include the following:


CEO compensation in 2018 (stock-options-realized measure). Using the stock-options-realized measure, we find that the average compensation for CEOs of the 350 largest U.S. firms was $17.2 million in 2018. Compensation dipped 0.5% in 2018 following a 7.6% gain in 2017. CEO compensation measured with realized stock options grew 52.6% over the recovery from 2009 to 2018.

CEO compensation in 2018 (stock-options-granted measure). Using the stock-options-granted measure, the average compensation for CEOs of the 350 largest U.S. firms was $14.0 million in 2018, up 9.9% from $12.7 million in 2017 and up 29.4% since the recovery began in 2009.

Growth of CEO compensation (1978–2018). From 1978 to 2018, inflation-adjusted compensation based on realized stock options of the top CEOs increased 940.3%. The increase was more than 25–33% greater than stock market growth (depending on which stock market index is used) and substantially greater than the painfully slow 11.9% growth in a typical worker’s annual compensation over the same period. Measured using the value of stock options granted, CEO compensation rose 1,007.5% from 1978 to 2018.

Changes in the CEO-to-worker compensation ratio (1965–2018). Using the stock-options-realized measure, the CEO-to-worker compensation ratio was 20-to-1 in 1965. It peaked at 368-to-1 in 2000. In 2018 the ratio was 278-to-1, slightly down from 281-to-1 in 2017—but still far higher than at any point in the 1960s, 1970s, 1980s, or 1990s. Using the stock-options-granted measure, the CEO-to-worker compensation ratio rose to 221-to-1 in 2018 (from 206-to-1 in 2017), significantly lower than its peak of 386-to-1 in 2000 but still many times higher than the 45-to-1 ratio of 1989 or the 16-to-1 ratio of 1965.

Changes in the composition of CEO compensation. The composition of CEO compensation is shifting away from the use of stock options and toward the use of stock awards, which now average $7.5 million for each CEO and make up roughly half of all CEO compensation. Stock-related components of compensation—stock options and stock awards—make up two-thirds to three-fourths of all CEO compensation, depending on the particular measure used. The shift from stock options to stock awards leads to an understatement of CEO compensation levels and growth in our measures as well as in other measures, including the measure prescribed in SEC reporting requirements.

Changes in the CEO-to-top-0.1% compensation ratio (1989–2018). Over the last three decades, compensation for CEOs based on realized stock options grew far faster than that of other very highly paid workers (the top 0.1%, or those earning more than 99.9% of wage earners). CEO compensation in 2017 (the latest year for which data on top wage earners are available) was 5.40 times greater than wages of the top 0.1% of wage earners, a ratio 2.22 points higher than the 3.18 average ratio over the 1947–1979 period. This wage gain alone is equivalent to the wages of more than two very-high-wage earners.

Implications of the CEO-to-top-0.1% compensation ratio. The fact that CEO compensation has grown far faster than the pay of the top 0.1% of wage earners indicates that CEO compensation growth does not simply reflect a competitive race for skills (the “market for talent”;) that also increased the value of highly paid professionals: Rather, the growing differential between CEOs and top 0.1% earners suggests the growth of substantial economic rents in CEO compensation (income not related to a corresponding growth of productivity). CEO compensation appears to reflect not greater productivity of executives but the power of CEOs to extract concessions. Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on the economy’s output or on employment.

Growth of top 0.1% compensation (1978–2017). Even though CEO compensation grew much faster than the earnings of the top 0.1% of wage earners, that doesn’t mean the top 0.1% did not fare well. Quite the contrary. The inflation-adjusted annual earnings of the top 0.1% grew 339.2% from 1978 to 2017. CEO compensation, however, grew three times as fast!

CEO pay growth compared with growth in the college wage premium. Over the last three decades, CEO compensation increased more relative to the pay of other very-high-wage earners than did the wages of college graduates relative to the wages of high school graduates. This finding indicates that the escalation of CEO pay does not simply reflect a more general rise in the returns to education.


Analysis


This section provides detailed analysis of our findings. We examine several decades of available data to identify recent and historical trends in CEO compensation.


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