CEOs Recovering Well, Workers Not So Much

Escalating CEO compensation is a major contributor to income inequality. Along with financial sector pay, growing CEO compensation has helped more than double the income share of the top 1 percent over the past three decades. Moreover, the fact that CEO pay has risen so quickly since the end of the Great Recession is an indicator that the top 1 percent is doing far better than ordinary Americans in the recovery.

One way to illustrate the increased divergence between CEO pay and an average worker’s pay over time is to examine the ratio of CEO compensation to that of a typical worker, the CEO-to-worker compensation ratio. Our new EPI paper, CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners, presents this analysis of CEO compensation based on our tabulations of Compustat’s ExecuComp data. The ratio measures the distance between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.

The CEO-to-worker compensation ratio1 in 2012 of 272.9 is far above the ratio in 1995 (122.6), 1989 (58.5), 1978 (29.0), and 1965 (20.1), as shown in the figure below. This illustrates that CEOs have fared far better than the average worker over the last several decades. It is also true that CEO compensation has grown far faster than the stock market or the productivity of the economy.

In fact, average CEO compensation was $14.1 million in 2012, using a measure of CEO pay that includes the value of stock options exercised in a given year, up 12.7 percent since 2011 and 37.4 percent since 2009. Over the entire period from 1978 to 2012, CEO compensation measured with options realized increased about 875 percent, a rise more than double stock market growth and substantially greater than the painfully slow 5.4 percent growth in a typical worker’s compensation over the same period.

Figure C

CEO-to-worker compensation ratio, with options granted and options realized, 1965–2012

Year Options realized Options granted
1965 20.1 18.3
1966 21.3 19.4
1967 22.5 20.5
1968 23.8 21.7
1969 23.4 21.3
1970 23.1 21.0
1971 22.7 20.7
1972 22.4 20.4
1973 22.1 20.1
1974 23.3 21.2
1975 24.6 22.4
1976 26.0 23.7
1977 27.5 25.0
1978 29.0 26.5
1979 30.9 28.2
1980 33.0 30.0
1981 35.1 32.0
1982 37.5 34.1
1983 39.9 36.4
1984 42.5 38.8
1985 45.3 41.3
1986 48.3 44.0
1987 51.5 46.9
1988 54.9 50.0
1989 58.5 53.3
1990 71.0 64.7
1991 86.1 78.4
1992 104.4 95.2
1993 111.8 99.9
1994 87.3 119.0
1995 122.6 136.8
1996 153.8 183.3
1997 233.0 236.9
1998 321.8 317.7
1999 286.7 301.5
2000 383.4 411.3
2001 214.2 338.7
2002 188.5 236.1
2003 227.5 223.8
2004 256.6 231.2
2005 308.0 242.9
2006 341.4 244.8
2007 351.3 244.1
2008 234.3 225.7
2009 193.2 181.6
2010 227.9 205.9
2011 231.8 214.6
2012 272.9 202.3

Note: This figure uses the "Options granted" compensation data series which includes salary, bonuses, restricted stock grants, options granted, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales. This figure also uses the "Options realized" compensation data series which includes salary, bonuses, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales.

Source: Authors' analysis of data from Compustat's ExecuComp database, the Current Employment Statistics program, and the Bureau of Economic Analysis NIPA tables

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The increase in CEO pay over the past few years reflects improving market conditions driven by macroeconomic developments and a general rise in profitability. For most firms, corporate profits continue to improve and corporate stock price is moving accordingly. It seems evident that individual CEOs are not responsible for this broad improvement in profits in the past few years, but they clearly are benefitting from it. The stark increases in CEO compensation do not simply, or even primarily, reflect an increase in their contribution to productivity.

This analysis makes it clear that the economy is recovering for some Americans, but not for most. The stock market and corporate profits have rebounded following the Great Recession, but the labor market remains very sluggish. Those at the top of the income distribution, including many CEOs, are seeing a strong recovery while the average worker is still experiencing the detrimental effects of a stagnant labor market.

1. This blog post uses the “Options realized” compensation data series which includes salary, bonuses, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales. Though EPI also calculates a measure using the value of options granted rather than exercised, this is our preferred metric and the one most commonly used in economic research.

  • Narendra Bhandari

    Narendra C. Bhandari, Ph. D.
    Professor of MGT, Pace University, New York
    July 3, 2013
    To start with, I want to express my congratulations to Dr. Lawrence Mishel and Ms. Natalie Sabadish for their scholarly and informative article titled “CEO Pay and the Top 1%. (EPI, May 2, 2013). I also commend the EPI for making all the efforts that they are to
    improve the American economy and the lives of its people.
    In my opinion, a fundamental reason behind the widening gap between the compensation of an average worker and an average CEO is the former’s declining bargaining power. With the millions of jobs being offshored year after year, the average American worker is more concerned about getting or keeping a job; and less so about what
    his/her CEO is making. The threat of not getting a job or losing a job is too
    real to criticize the relatively much larger size of the CEO’s compensation.
    In my opinion, the enactment of trade equilibrium (see the definition below) would bring full employment for generations to come. Workers would not be afraid of their jobs being offshored. They can then work toward reducing disparity between their and their bosses’ compensation. America cannot reduce this gap without full employment; which in turn cannot materialize without first accomplishing trade
    equilibrium and full employment.

    I define “trade-equilibrium,” an otherwise widely used term with different interpretations, as follows: “Trade Equilibrium is a situation when trading among various countries is such that the trading partners remain generally deficit-free from one another over a cycle of every 2-3 years.”
    My theory of trade equilibrium has two major goals: (a) to stop exporting of additional American jobs and (b) to regain the American jobs already exported by “legally requiring” the dollar/trade surplus countries to eliminate their surplus over a ten year period by buying American products (goods and services). Further, according to this theory, it is the responsibility of America’s trading partners with dollar surpluses to make sure to meet the requirements of the trade equilibrium as defined here.
    Within these 2-3 years cycles, however, a foreign country can of course use its surplus dollars to buy products from countries other than America. In that case, these other countries would have the surplus dollars and, therefore, must use them to buy products from America to enable America to maintain its trade equilibrium.

    Since the trade equilibrium would provide full employment for workers and enhance their incomes, pro-workers individuals and organizations should be glad to support it. Likewise, since the trade equilibrium would increase investment, corporate profits, shareholders’ wealth, and executive bonuses, the pro-free and fair enterprise individuals and institutions should be pleased to endorse it. And since the trade equilibrium would raise tax revenues and reduce tax rates; all the policy makers should be happy to lead its enactment.
    I believe that if America can create Jobs Acts of 2004 and 2009 to help create jobs, it can also create a trade equilibrium act that would guarantee a seamless scenario of full time employment. If it can create the Export Import bank of 1944 to help promote the U.S. exports, it can also legislate the theory of trade equilibrium that would guarantee zero trade deficit going forward and create an export surplus of $484.6 billion a year for the next ten years (10% of $4.846 trillion dollars the U.S. recently owed to other countries on current account. Sources of data: U.S. Government publications).

    Within the framework of a free and fair trade system, the theory of Trade Equilibrium would protect and create millions of American jobs. With more jobs and higher incomes, Americans would spend more on American and foreign products. The consequential multiplication
    of free and fair trade and investments between and within countries
    will provide a multi-generational seamless solution to the problems of unemployment and poverty world over. The ensuing global economic
    growth would promote creativity, innovations, peace and prosperity. It would be a win-win, positive-sum economic stimulus, not a zero-sum game.

    Over the years America has experimented with a variety of
    strategies to protect and create jobs. These include, among others,
    infrastructural development, tax breaks, unemployment benefits, currency
    management, and educational programs. Unfortunately, they have failed to stop offshoring of millions of jobs year after year for two fundamental reasons. First, many of the American firms receiving the stimulus money invest some of it overseas. Second, the individual recipients of these benefits spend a good portion of these to purchase cheaper products made abroad. It is like trying to fill a bucket full of holes with water.
    The United States must thoroughly evaluate the premises,
    the mathematics, the simplicity, and the benefits of my theory of Trade
    Equilibrium and compare it with similar other approaches, tried or imagined, and then consider legislating it.
    The Economic Policy Institute should consider starting research on the proposed theory of trade equilibrium. Thanks.