The SEC has given these claims far too much credence, providing firms tremendous leeway in how to construct the ratios. 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.
The data on median compensation are not provided on a per-hour basis or annualized to that of a full-time, full-year worker. Without such information, or simply the annual hours worked by the median worker, it is not possible to standardize the compensation for comparisons across firms.
In addition, firms may not adhere to the same metric each year, limiting the ability to make historical comparisons in the future. Our examination of CEO compensation continues to provide crucial data points for evaluating current CEO compensation trends as well as trends in CEO compensation over time.
Executive compensation
Our methodology described in Sabadish and Mishel has a number of advantages over the SEC-prescribed methodology for constructing ratios. It thereby eliminates artificial reductions in a company-reported CEO-to-worker pay ratio that could arise from the extensive use of subcontracting. Second, our worker compensation series reflects annualized compensation multiplying an estimate of hourly compensation by 2, hours , eliminating the ambiguity that arises when weeks worked and hours per week are not specified or when they differ across firms as can be the case for the SEC ratios.
This assumption also likely makes our ratio a more conservative estimate of the true ratio than the ratios reported to the SEC. Third, our analysis captures the ratio of CEO compensation to compensation of U. Fourth, our series is able to extend back to , allowing us to analyze trends in executive compensation over time. The consistent basis of the measurement of our ratios permits historical comparisons on a year-to-year basis. These and other benefits are why we continue to produce our CEO-to-worker pay series—although it is our hope that with time the ambiguities of the SEC ratio will be addressed and adjusted, to produce a reliable time series for investors and the public to use going forward.
This ratio grew to to-1 in and to-1 by It surged in the s, hitting to-1 in , at the end of the s recovery. The fall in the stock market after reduced CEO stock-related pay e. CEO compensation recovered to a level of times worker pay by , almost back to its level. The financial crisis of and accompanying stock market decline reduced CEO compensation between and , as discussed above, and the CEO-to-worker compensation ratio fell in tandem.
By the stock market had recouped all of the value it had lost following the financial crisis, and the CEO-to-worker compensation ratio in had recovered to to The ratio bumped up in and basically was stable in , dipping a bit to to Although the CEO-to-worker compensation ratio remains below the value achieved in , at the peak of the stock market bubble, it is far higher than it was in the s, s, s, and s. The pattern using the CEO compensation measure that values stock options as they are granted is similar.
The CEO-to-worker pay ratio peaked in , at to-1, even higher than the ratio with the stock-options-realized measurement. The fall from to was steeper than for the other measure, hitting to-1 in The stock market decline during the financial crisis drove the ratio down to to-1 in It recovered to to-1 by and, after dipping a bit over the next three years, ended back up at to-1 in This level is far lower than its peak in but still far greater than the ratio of to-1 or the ratio of to This section reviews competing explanations for the extraordinary rise in CEO compensation over the past several decades.
CEO compensation has grown a great deal since , but so has the pay of other high-wage earners. To some analysts, this suggests that the dramatic rise in CEO compensation has been driven largely by the demand for the skills of CEOs and other highly paid professionals. Over the last 20 years, then, public company CEO pay relative to the top 0. 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. Kaplan a, 4.
In a follow-up paper for the Cato Institute, published as a National Bureau of Economic Research working paper, Kaplan expands this point:. 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.
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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.
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Kaplan b, Bivens and Mishel address the larger issue of the role of CEO compensation in generating income gains at the very top and conclude that substantial rents are embedded in executive pay. According to Bivens and Mishel, CEO pay gains are not the result of a competitive market for talent but rather reflect the power of CEOs to extract concessions.
Here we draw on and update the Bivens and Mishel analysis to show that CEO compensation grew far faster than compensation of very 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. Table 3 shows the ratio of the average compensation of CEOs of large firms the series developed by Kaplan, incorporating stock options realized to the average annual earnings of the top 0. Both the simple ratios and the log ratios understate the relative pay of CEOs, because CEO pay is a nontrivial share of the denominator, a bias that has probably grown over time as CEO relative pay has grown.
Note: The college-to-high-school wage ratios compare hourly wages of workers who have a college degree with hourly wages of workers who have only a high school diploma. For comparison purposes, Table 3 also shows the changes in the gross not regression-adjusted college-to-high-school wage premium. The comparisons end in because data for top 0. CEO pay was 5. CEO compensation grew far faster than that of the top 0.
Essays on Stock Option Schemes and CEO Compensation
CEO compensation relative to the wages of the top 0. Is this increase large? His historical comparisons are inaccurate, however. Figure D compares the ratios of the compensation of CEOs to compensation of the top 0. In this ratio was 5. That CEO compensation grew much faster than the earnings of the top 0. The inflation-adjusted annual earnings of the top 0. CEO compensation, however, grew three times faster!
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The data in Table 3 also provide a benchmark of CEO compensation to that of the college-to-high-school wage premium. Since , and particularly since , 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.
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. For everyone else, the distribution of skills, as reflected in the overall wage distribution, tends to be much more continuous.
Some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no consequences for the vast majority of workers. However, the escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.
Forty-four percent of the growth of the top 0. These shares may actually understate the role of nonfinance executives and the financial sector, because they do not account for increased spousal income from these sources in those cases where the head of household is not an executive or in finance. 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 describes the Lake Wobegon world of setting CEO compensation that fuels its growth: Every firm wants to believe its CEO is above average and therefore needs to be correspondingly remunerated. But, in fact, CEO compensation could be reduced across the board and the economy would not suffer any loss of output. Another implication of rising pay for CEOs and other executives is that it reflects income that otherwise would have accrued to others: What these executives earned was not available for broader-based wage growth for other workers.
Bivens and Mishel explore this issue in depth. Several policy options could reverse the trend of excessive executive pay and broaden wage growth. 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.
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Another option is to set corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation. Clifford 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. One key example of such a fundamental change would be to provide worker representation on corporate boards. The authors thank the Stephen Silberstein Foundation for its generous support of this research. Steven Balsam , an accounting professor at Temple University and author of Equity Compensation: Motivations and Implications , has provided useful advice on data construction and interpretation over the years.
Lawrence Mishel is a distinguished fellow and former president of the Economic Policy Institute. He is the co-author of all 12 editions of The State of Working America. His articles have appeared in a variety of academic and nonacademic journals. His areas of research include labor economics, wage and income distribution, industrial relations, productivity growth, and the economics of education. He holds a Ph.
Julia Wolfe is a research assistant at the Economic Policy Institute. She holds a B. We use Compustat estimates of the fair value of options awarded; these estimates are determined using the Black Scholes model. See Sabadish and Mishel for more information about our data sources and methodology. It may seem counterintuitive that the two ratios for are different from each other when the average CEO compensation is the same. It is important to understand that as we describe later in this report we do not create the ratio from the averages; rather we construct a ratio for each firm and then average the ratios across firms.
There were 38, executives in publicly held firms and 9, people in the top 0. Most Fortune companies release annual financial data in early spring; the data are included in samples limited to the first half of the year. However, the data we present for previous years include all of the data that were released during each calendar year. We analyze the impact of this bias and find that the vast majority of top firms remain unchanged between the samples for the first half and the full year. However, there is churn among the smaller firms in the sample. Among firms with lower net annual sales, average CEO compensation tends to be higher in the full-year sample.
Additionally, in recent years firms reporting later in the year have tended to be firms with lower worker compensation levels and therefore higher CEO-to-worker compensation ratios. ExecuComp had flaws in the measure of fair value measure of stock awarded in the data used in our last report as detailed in Box A in Mishel and Scheider that required an adjustment to the data. The data have now been corrected by ExecuComp. We reported that compensation using options realized grew Schieder and Baker test for this effect by comparing the path of CEO pay in the health insurance industry with the CEO pay trajectory for companies that were not affected by the ACA provision.
A variety of tests that controlled for revenue growth, profit growth, stock price appreciation, and other relevant factors found no evidence that the loss of deductibility had any effect on the trends in CEO pay in the health insurance industry. Companies were apparently willing to absorb the additional cost from the change in the tax provision rather than reduce CEO pay. The provision has been in effect for only just over a year, so it is too early to make any assessments of its impact. But there is little reason to believe that the effect of ending tax deductibility more generally will be any different than the effect of ending it in the health insurance industry.