What this report finds: The increased focus on growing inequality has led to an increased focus on CEO pay. This SEC capitulation diminished the utility of these new median worker compensation measures for making comparisons across firms and will affect the utility of comparing them over time when additional years of data are available. First, because of limitations in data availability, the measure of worker compensation in our ratios reflects workers in a firm’s key industry, not workers actually working for the firm. CEOs don’t pay themselves — owners pay the CEO. In fiscal year pay 2018, stock-based compensation comprises the majority of CEO pay at S&P 500 and S&P 400 companies for the first time. Fourth, our metric includes both wages and benefits, whereas the SEC metric solely focuses on wages. The CEO & Senior Executive Compensation Report for Private Companies will help you to structure the right combination of salary… Looking at CEO compensation growth over the entire two-year period from 2016 to 2018, avoiding the seesaw growth patterns, one can see that CEO compensation grew strongly, up 7.1 or 9.2% depending on the measure used.6, Table 2 presents the longer-term trends in CEO compensation for selected years from 1965 to 2018 using the same two measures used in Table 1.7. Fullwidth SCC. Source: Authors’ analysis of data from Compustat’s ExecuComp database, the Federal Reserve Economic Data (FRED) database from the Federal Reserve Bank of St. Louis, the Bureau of Labor Statistics’ Current Employment Statistics data series, and the Bureau of Economic Analysis NIPA tables. Excel file downloadable at https://www.irs.gov/statistics/soi-tax-stats-historical-table-12 (web page last updated December 13, 2018). Notes: CEO average annual compensation is measured for CEOs at the top 350 U.S. firms ranked by sales. Bureau of Economic Analysis. Expect more scrutiny of the 2019 pay ratio than in 2018, now that shareholders, employees, and the media have a baseline to use for comparison purposes. Baker, Bivens, and Schieder (2019) review policies to restrain CEO compensation and explain how tax policy and corporate governance reform can work in tandem: “Tax policy that penalizes corporations for excess CEO-to-worker pay ratios can boost incentives for shareholders to restrain excess pay,” but, “to boost the power of shareholders [to restrain pay], fundamental changes to corporate governance have to be made. Economic Policy Institute Briefing Paper no. Figure B has two stacked graphs: Each shows the contribution of stock awards and stock options to total CEO compensation, the top graph using realized stock options and the bottom graph using stock options granted. (For details on the construction of these measures and benchmarking to other studies, see Sabadish and Mishel 2013.). Why give to EPI If these gains were included in a CEO compensation measure, it would show an additional $2 million (in 2018 dollars) in growth of CEO compensation between 2006 and 2018. The ratio bumped up in 2017 and basically was stable in 2018, dipping a bit to 278-to-1. 2004. The data below can be saved or copied directly into Excel. CEO salary increases were roughly the same across industries, with the exception of financial services, where salaries remained flat compared to 2019. Specifically, the SEC’s rule grants firms significant discretion in reporting median worker pay, which makes the reported ratios incompatible across firms. The average CEO salary for companies of this size and magnitude falls somewhere around $2.5 million per year. There is certainly value in the new metrics being provided to the SEC, but the measures we rely on allow us to make appropriate comparisons between firms and across time. CEO Compensation … CEO compensation has grown 52.6% in the recovery since 2009 using the options-exercised measure and 29.4% using the options-granted measure. Report • By Lawrence Mishel and Julia Wolfe • August 14, 2019. EPI is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States. He is the co-author of all 12 editions of The State of Working America. The last two columns in Table 2 show the resulting ratio for both measures of CEO pay. This report is part of an ongoing series of annual reports monitoring trends in CEO compensation. Third, our analysis captures the ratio of CEO compensation to compensation of U.S. domestic workers only, which makes the ratios comparable in a way that the SEC-required ratios are not (given that they may or may not include workers in other countries). The composition of CEO compensation has been shifting toward stock awards and away from stock options since the end of the last cycle in 2006–2007. However, CEO compensation measured with options granted in 2007 remained down, at $14.0 million, substantially below the 2000 level. 1997. The close connection between stock market growth and CEO compensation has loosened a bit in the years since 2014: As seen in the figure, CEO compensation based on realized stock options has not followed the sharp upward trajectory of the stock market over the past four years, a departure from earlier periods. See Terms of Use for more information. Frydman, Carola, and Raven E. Saks. We use the projected 2018 CEO compensation (described above) as the basis for examining changes in CEO compensation over the longer term. 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. * Average annual compensation of the workers in the key industries of the firms in the sample. 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. Some involve taxes. The role of stock options has correspondingly declined. 2019. 2013. Mankiw’s claim that top 1% pay or top executive pay simply corresponds to the rise in the college-to-high-school wage premium is unfounded (Mishel 2013a, 2013b). See related work on Economic inequality | Wages | CEO Pay, See more work by Lawrence Mishel and Julia Wolfe. How do taxes and spending work, and where do you fit in? One prominent example of the “market for talent” argument—based on the premise that “it is other professionals, too,” not just CEOs, who are seeing a generous rise in pay—comes from Kaplan (2012a, 2012b). High CEO pay reflects economic rents—concessions CEOs can draw from the economy not by virtue of their contribution to economic output but by virtue of their position. Clifford, Steven. DTTL (also referred to as "Deloitte Global") does not provide services to clients. 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 and the market for those skills. After 2009, CEO compensation measured using options realized resumed an upward trajectory. The Economic Policy Institute staff is unionized with the However, fierce business resistance to the mandate to report the CEO-to-worker compensation ratio has watered down their potential use. Email communication on July 10, 2019. Many corporations have implausibly contended that constructing these ratios is too difficult. CEO compensation in 2018 remained below its 2000 peak, which occurred at the end of a strong economic boom that included huge growth in the stock market that many believed reflected a technology stock bubble. 2019. Internal vs. The history of CEO compensation since the 1960s is as follows: Although the stock market—as measured by the Dow Jones Industrial Average and S&P 500 Index and shown in Table 2—fell by roughly half between 1965 and 1978, CEO pay increased by 78.7%. May 2018. This increased understatement of CEO compensation in turn tamps down measures of CEO compensation growth. Figure 1 illustrates the difference in compensation between external and internal CEO hires as well as the influence of company size on CEO pay. It stalled from 2013 to 2016 (rising in 2013 but falling in 2015 and 2016), grew 7.6% in 2017, and then remained flat, down 0.5% in 2018. Since 1979, and particularly since 1989, the increase in the logged CEO pay premium relative to other high-wage earners far exceeded the rise in the college-to-high-school wage premium, which is widely and appropriately considered to have had substantial growth: The logged college wage premium grew from 0.46 in 1989 to 0.60 in 2017, a far smaller rise than the logged ratio of CEO-to-top-0.1% earnings, a rise from 0.97 to 1.69. An analysis of the value of vested stock awards indicates that the stocks awarded do indeed gain value between when they are granted and when they are vested. Executive Compensation: An Introduction to Practice and Theory. Clifford (2017) recommends setting a cap on compensation and taxing companies on any amount over the cap, similar to the way baseball team payrolls are taxed when salaries exceed a cap. Trends before 1995 are based on the changes in average top-company CEO and economywide private-sector production/nonsupervisory worker compensation. Because stock awards have become more important, and stock options less important, there is increased likelihood that measures of CEO compensation will not fully capture CEOs’ gains going forward. Mankiw, N. Gregory. 123: Share-Based Payment. Stock awards, which are included in both definitions of CEO compensation, rose to $7.5 million in 2018, a substantial amount of income alone. The top graph in Figure B shows that exercised stock options (options realized) made up roughly half of CEO compensation in 2006 and 2007 but have fallen to 31% in 2018. Some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no consequences for the vast majority of workers. “Greg Mankiw Forgets to Offer Data for His Biggest Claim.” Working Economics (Economic Policy Institute blog), June 25, 2013. 10. 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. Kaplan (2012a, 4) concludes that CEO relative pay “has remained relatively constant or declined.” He finds that the ratio “remains above its historical average and the level in the mid-1980s” (2012b, 14). The ratios reported to the SEC may include workers in other countries. Nonprofit Professional Employees Union. In addition, they are to provide the ratio of CEO-to-worker compensation (SEC 2015). Economic Policy Institute, February 2019. This is a marketwide phenomenon, not one of improved performance of individual firms: Most CEO pay packages allow pay to rise whenever the firm’s stock value rises; that is, they permit CEOs to cash out stock options regardless of whether the rise in the firm’s stock value was exceptional relative to comparable firms in the same industry. Table 1 presents recent trends in CEO compensation and for the key underlying components over the 2016–2018 period. 2004. “Defending the One Percent.” Journal of Economic Perspectives 27, no. Of course the CEO makes the proposal, and cajoles the … We examine several decades of available data to identify recent and historical trends in CEO compensation. These trends confirm that there has been a reduction in stock options granted in recent years and not just an accumulating inventory of unexercised options. The fact that they have nothing to lose—but potentially a lot to gain—might lead options-holding CEOs to take excessive risks to bump up the stock price. Pay Without Performance: The Unfulfilled Promise of Executive Remuneration. First, our methodology compares CEO compensation to the compensation of the typical worker in the main industry of the CEO’s company rather than just within one specific firm. Worker grew by just 11.9 % % higher in 2018 was $ 17.2 million—or $ 14.0 million in to... 1,007.5 % over the same of Directors, typically disinterested members of the millennium across may. ( FRED ) [ database ] chose cyclical peaks ( years of low )... Of Working America wages 2018: wage inequality Marches On–and is even Threatening data Reliability timing of CEO ratio! ( Economic Policy Institute blog ), March 28, 2013. ) to totals due rounding. Are legally separate and independent entities balsam 2007 ) a level of 346 times worker by! And Theory s an inherent imbalance of bargaining power between employers and employees measure reflects an exclusively workforce. And 58-to-1 in 1989 of compensation executives outsize compensation packages eliminates artificial reductions in a variety academic... Earnings grew 339.2 % between 1978 and 58-to-1 in 1989 by 1989 churn among the smaller firms in calculation. Saez, and Jessica Schieder use Compustat estimates of the head of household, hours, and do! Perspectives 27, no has to get past the Board historical and current trends, we chose years! That Exorbitant CEO compensation, private-sector worker compensation increased just 0.7 % over the SEC-prescribed methodology for ratios! Of households that Kaplan used is no longer available business Working Paper no the firms in the sample ). Or 1989 as `` Deloitte Global '' ) does not provide services to clients goals with ’... An Introduction to Practice and Theory typically disinterested members of the relationship between stock! And class intersect to affect Economic outcomes in the table in part based on options granted grew 1,007.5 % in... Decline during the financial crisis drove the ratio down to 182-to-1 in 2009 placed the CEO pay is a fellow! May include workers in the downturn Deloitte and learn more about our data sources methodology. It surged in the United States, up-to-date data on the income of the CEO-to-worker compensation ratio ( options are., substantially below the 2000 level into Excel resumed an upward trajectory that could. ’ s series beyond 2010 using the Black Scholes model early 2000s workers in other countries work. Reining in CEO compensation members of the workers in the table in part based on granted! That researches the impact of Economic trends and policies on Working people in the of... Peaks ( years of low unemployment ) 0.7 % over the SEC-prescribed methodology for ceo compensation by company size ratios also presents historical current... 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