CEO Pay Continues to Rise as Typical Workers Are Paid Less

CEO Pay Continues to Rise as Typical Workers Are Paid Less

Lawrence Mishel and Alyssa Davis | June 12, 2014 6. décembre 2014

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.

    CEO compensation trends

    Table 1 presents trends in CEO compensation from 1965 to 2013.2 The data measure the compensation of CEOs in large firms and incorporate stock options according to how much the CEO realized in that particular year by exercising stock options available. The options-realized measure reflects what CEOs report as their Form W-2 wages for tax reporting purposes and is what they actually earned in a given year. This is the measure most frequently used by economists.3 In addition to stock options, the compensation measure includes salary, bonuses, restricted stock grants, and long-term incentive payouts. Full methodological details for the construction of this CEO compensation measure and benchmarking to other studies can be found in Mishel and Sabadish (2013). We make one exception to this selection criteria, which is to exclude Facebook from the samples in 2012 and 2013 (the only years for which the firm has been public). This is because the compensation of the CEO is such an outlier (compensation of $2.3 billion in 2012 and $3.3 billion in 2013) that including Facebook dramatically alters our results. We report the results excluding and including Facebook in our discussion below but exclude the firm in calculations in all the tables and figures.

    Table 1

    CEO compensation, CEO-to-worker compensation ratio, and stock prices, 1965–2013 (2013 dollars)

    CEO annual compensation (thousands)* Worker annual compensation (thousands) Stock market (adjusted to 2013) CEO-to-worker compensation ratio***
    Private-sector production/
    nonsupervisory workers    		 Firms’ industry** S&P 500 Dow Jones
    1965 $819 $39.5 n/a          570            5,889 20.0
    1973 $1,069 $46.4 n/a          503            4,330 22.3
    1978 $1,463 $47.2 n/a          315            2,691 29.9
    1989 $2,724 $44.7 n/a          586            4,553 58.7
    1995 $5,768 $45.6 $51.5          822            6,829 122.6
    2000 $20,172 $47.9 $53.8       1,931          14,506 383.4
    2007 $18,541 $50.4 $54.0       1,660          14,805 351.3
    2009 $10,394 $52.0 $57.3       1,030            9,650 193.2
    2010 $12,466 $52.7 $58.0       1,218          11,398 227.9
    2011 $12,667 $52.3 $57.6       1,313          12,381 231.8
    2012 $14,765 $52.0 $57.1       1,400          13,155 278.2
    2013 $15,175 $52.1 $55.8       1,644          15,010 295.9
    Percent change Change in ratio
    1965–1978 78.7% 19.5% n/a -44.8% -54.3% 9.9
    1978–2000 1,279% 1.4% n/a 513% 439% 353.6
    2000–2013 -24.8% 8.7% 3.6% -14.9% 3.5% -87.6
    1978–2013 937% 10.2% n/a 422% 458% 237.2

    * CEO annual compensation is computed using the “options realized” compensation series, which includes salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 U.S. firms ranked by sales.
    ** Annual compensation of the workers in the key industry of the firms in the sample
    *** Based on averaging specific firm ratios and not the ratio of averages of CEO and worker compensation

    Source: Authors’ analysis of data from Compustat’s ExecuComp database, Federal Reserve Economic Data (FRED) from the Federal Reserve Bank of St. Louis, the Current Employment Statistics program, and the Bureau of Economic Analysis NIPA tables

    CEO compensation reported in Table 1, as well as throughout the rest of the report, is the average compensation of the CEOs in the 350 publicly owned U.S. firms (i.e., firms that sell stock on the open market) with the largest revenue each year. Our sample each year will be fewer than 350 firms to the extent that these large firms did not have the same CEO for most of or all of the year. For comparison, Table 1 also presents the annual compensation (wages and benefits of a full-time, full-year worker) of a private-sector production/nonsupervisory worker (a group covering more than 80 percent of payroll employment), allowing us to compare CEO compensation with that of a “typical” worker. From 1995 onward, the table identifies the average annual compensation of the production/nonsupervisory workers in the key industries of the firms included in the sample. We take this compensation as a proxy for the pay of typical workers in these particular firms.

    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.

    Figure A

    CEO compensation and the S&P 500 Index (in 2013 dollars), 1965–2013

    Year CEO compensation (in millions of 2013 dollars) S&P 500 Index (adjusted to 2013)
    1965/01/01 $0.8 570.0589
    1966/01/01 $0.8 535.6632
    1967/01/01 $0.8 560.7757
    1968/01/01 $1.0 577.2277
    1969/01/01 $1.0 549.2137
    1970/01/01 $1.0 445.2654
    1971/01/01 $1.0 504.2769
    1972/01/01 $1.0 543.4261
    1973/01/01 $1.1 503.4962
    1974/01/01 $1.1 352.6655
    1975/01/01 $1.1 339.2656
    1976/01/01 $1.1 379.8092
    1977/01/01 $1.1 343.7807
    1978/01/01 $1.5 314.9352
    1979/01/01 $1.5 308.0096
    1980/01/01 $1.5 319.5176
    1981/01/01 $1.5 314.673
    1982/01/01 $1.5 277.4579
    1983/01/01 $1.5 356.7043
    1984/01/01 $1.5 342.6552
    1985/01/01 $1.5 385.6832
    1986/01/01 $1.5 479.3659
    1987/01/01 $1.5 562.9742
    1988/01/01 $1.5 503.0838
    1989/01/01 $2.7 585.9778
    1990/01/01 $2.7 578.1663
    1991/01/01 $2.7 627.4724
    1992/01/01 $4.8 676.3104
    1993/01/01 $5.4 716.9178
    1994/01/01 $4.3 715.6278
    1995/01/01 $5.8 822.1935
    1996/01/01 $7.3 991.2621
    1997/01/01 $11.2 1263.961
    1998/01/01 $16.6 1549.226
    1999/01/01 $14.7 1855.658
    2000/01/01 $20.2 1930.613
    2001/01/01 $11.2 1571.265
    2002/01/01 $9.9 1287.006
    2003/01/01 $12.7 1222.529
    2004/01/01 $14.0 1394.36
    2005/01/01 $16.3 1440.507
    2006/01/01 $18.2 1514.044
    2007/01/01 $18.5 1659.595
    2008/01/01 $13.2 1319.974
    2009/01/01 $10.4 1029.612
    2010/01/01 $12.5 1217.938
    2011/01/01 $12.7 1312.529
    2012/01/01 $14.8 1399.563
    2013/01/01 $15.2 1643.8
    CEO compensation (in millions of 2013 dollars)S&P 500 Index (adjusted to 2013)S&P 500 Index (adjusted to 2013)CEO compensation (in millions of 2013 dollars)1970198019902000201005101520$2505001,0001,5002,0002,500

    Note: CEO annual compensation is computed using the “options realized” compensation series, which includes salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 U.S. firms ranked by sales.

    Source: Authors’ analysis of data from Compustat’s ExecuComp database and Federal Reserve Economic Data (FRED) from the Federal Reserve Bank of St. Louis

    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.