(EDITOR’S NOTE: The Economic Policy Institute recently released the latest in its series examining CEO pay, which remains disproportionately high. Following is an excerpt from the report.)
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 1970s. They also earn far more than the typical worker, and their pay — which relies heavily on stock-related compensation — has grown much more rapidly than a typical worker’s pay.
Rising CEO pay does not reflect a rising value of skills or contribution to firms’ productivity. What has changed over the years is CEOs’ use of their power to set their own pay. In economic terms, this means that CEO compensation reflects substantial “rents” (income in excess of actual productivity). This is concerning since the earning power of CEOs has been driving income growth at the very top — a key dynamic in the overall growth of inequality. The silver lining in this otherwise unfortunate trend is that CEO pay can be curtailed without damaging economywide growth.
- Growth of CEO compensation (1978–2022). Since CEO pay is mostly stock based, calculating it is not entirely straightforward because the value of stocks is continually changing. We use two measures to give a fuller picture: a backward-looking measure—realized compensation—and a forward-looking measure—granted compensation. Using the realized compensation measure, compensation of the top CEOs shot up 1,209.2 percent from 1978 to 2022 (adjusting for inflation). Top CEO compensation grew roughly 28.1 percent faster than stock market growth during this period and far eclipsed the slow 15.3 percent growth in a typical worker’s annual compensation. CEO granted compensation rose 1,046.9 percent from 1978 to 2022.
- Changes in the CEO-to-worker compensation ratio (1965–2022). Using the realized compensation measure, the CEO-to-worker compensation ratio reached 344-to-1 in 2022. This stands in stark contrast to the 21-to-1 ratio in 1965. Most importantly, over the last two decades the ratio has been far higher than at any point in the 1960s, 1970s, 1980s, or early 1990s. Using the CEO granted compensation measure, the CEO-to-worker compensation ratio fell to 221-to-1 in 2022, significantly lower than its peak of 396-to-1 in 2000 but still many times higher than the 45-to-1 ratio of 1989 or the 15-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 stock awards. In 2006, stock options accounted for just over 70 percent of stock-related pay in realized CEO compensation. But in 2022, stock options were only 34 percent with vested stock awards accounting for the rest. Stock-related pay (exercised stock options and vested stock awards) averaged $20.5 million in 2022 and accounted for 81.3 percent of average realized CEO compensation.
- Changes in the CEO-to-top-0.1 percent compensation ratio. CEO compensation has even been breaking away from that of other very highly paid workers. Over the last three decades, compensation grew far faster for CEOs than it did for the top 0.1 percent of wage earners (those earning more than 99.9 percent of wage earners). CEO compensation in 2021 (the latest year for which data on top 0.1 percent wage earners are available) was 7.68 times as high as wages of the top 0.1 percent of wage earners, a ratio 4.1 points greater than the 3.61-to-1 average CEO-to-top-0.1 percent ratio over the 1951–1979 period.
- Implications of the growth of CEO-to-top-0.1 percent compensation ratio. The fact that CEO compensation has grown much faster than the pay of the top 0.1 percent of wage earners indicates that CEO compensation growth does not simply reflect a competitive race for skills (the “market for talent”) that would also increase the value of highly paid professionals more generally. Rather, the growing pay differential between CEOs and top 0.1 percent earners suggests the growth of substantial economic rents (income not related to a corresponding growth of productivity) in CEO compensation. CEO compensation does not appear to reflect the greater productivity of executives but their ability to extract concessions from corporate boards—a power that stems from dysfunctional systems of corporate governance in the United States. But because so much of CEOs’ income constitutes economic rent, there would be no adverse impact on the economy’s output or on employment if CEOs earned less or were taxed more.
- Growth of top 0.1 percent compensation (1979–2021). Even though CEO compensation grew much faster than the earnings of the top 0.1 percent of wage earners, that doesn’t mean the top 0.1 percent fared poorly. Quite the contrary. The inflation-adjusted annual earnings of the top 0.1 percent grew 465 percent from 1979 to 2021. CEO compensation, however, grew more than 2.5 times as fast!
(Josh Bivens is chief economist at the Economic Policy Institute. Jori Kandra is and EPI research assistant. To read the full report, visit https://www.epi.org/publication/ceo-pay-in-2022.)