Top CEO Compensation Soars, and Why We Do Not Look at “Average CEOs”

Our new study shows the average compensation of CEOs in the largest firms was $16.3 million in 2014, up 3.9 percent since 2013 and 54.3 percent since the recovery began in 2009. More impressively, from 1978 to 2014, inflation-adjusted CEO compensation increased 997 percent, a rise almost double stock market growth and substantially greater than the painfully slow 10.9 percent growth in a typical worker’s annual compensation over the same period. Consequently, the CEO-to-worker compensation ratio was 303-to-1 in 2014, lower than the 376-to-1 ratio in 2000 but far higher than the 20-to-1 in 1965 and any time in the 1960s, 1970s, 1980s, or 1990s, as the Figure shows.

Figure C

CEO-to-worker compensation ratio, 1965–2014

Year CEO-to-worker compensation ratio
1965/01/01 20.0
1966/01/01 21.2
1967/01/01 22.4
1968/01/01 23.7
1969/01/01 23.4
1970/01/01 23.2
1971/01/01 22.9
1972/01/01 22.6
1973/01/01 22.3
1974/01/01 23.7
1975/01/01 25.1
1976/01/01 26.6
1977/01/01 28.2
1978/01/01 29.9
1979/01/01 31.8
1980/01/01 33.8
1981/01/01 35.9
1982/01/01 38.2
1983/01/01 40.6
1984/01/01 43.2
1985/01/01 45.9
1986/01/01 48.9
1987/01/01 51.9
1988/01/01 55.2
1989/01/01 58.7
1990/01/01 71.2
1991/01/01 86.2
1992/01/01 104.4
1993/01/01 111.8
1994/01/01 87.3
1995/01/01 122.6
1996/01/01 153.8
1997/01/01 233.0
1998/01/01 321.8
1999/01/01 286.7
2000/01/01 376.1
2001/01/01 214.2
2002/01/01 188.5
2003/01/01 227.5
2004/01/01 256.6
2005/01/01 308.0
2006/01/01 341.4
2007/01/01 345.3
2008/01/01 239.3
2009/01/01 195.8
2010/01/01 229.7
2011/01/01 235.5
2012/01/01 285.3
2013/01/01 303.1
2014/01/01 303.4


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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, Current Employment Statistics program, and the Bureau of Economic Analysis NIPA tables

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Our measure of CEO pay covers chief executives of the top 350 U.S. firms and includes the value of stock options exercised in a given year plus salary, bonuses, restricted stock grants, and long-term incentive payouts. (Full methodological details here)

Our analysis, which shows that CEO pay grew far faster than pay of the top 0.1 percent of wage earners (those earning more than 99.9 percent of wage earners), indicates that CEO compensation growth does not simply reflect the increased value of highly paid professionals in a competitive race for skills (the so-called “market for talent”). CEO compensation in 2013 (the latest year for data on top wage earners) was 5.84 times greater than wages of the top 0.1 percent of wage earners, a ratio 2.66 points higher than the 3.18 ratio that prevailed over the 1947–1979 period. The compensation gains of top CEOs were therefore equivalent to the wages of 2.66 very-high-wage earners.

Don’t worry about all this, says American Enterprise Institute scholar Mark Perry, because our sample, and those used by the Associated Press and the Wall Street Journal, is misleading. Looking at the compensation of CEOs in the largest firms, according to Perry, is not “very representative of the average U.S. company or the average U.S. CEO,” because “the samples of 300–350 firms for CEO pay represent only one of about every 21,500 private firms in the U.S., or about 1/200 of 1 percent of the total number of U.S. firms.” Perry notes, “According to both the BLS and the Census Bureau, there are more than 7 million private firms in the U.S.”

“We can get a more accurate and complete picture of CEO compensation in the U.S. by looking at wage data released recently by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2014….In 2014, the BLS reports that the average pay for America’s 246,240 chief executives was only $180,700.”

This is a clever but misguided critique. Amazingly, roughly 16 percent of the CEOs in Perry’s preferred measure are in the public sector. Many others are in the nonprofit sector, including CEOs of religious organizations, advocacy groups, and unions. One wonders why Perry is not critical of the Bureau of Labor Statistics measure of CEO pay, since BLS reports there are only 207,660 private sector CEOs, far short of the 7.4 million there would be if each private firm had one. The shortfall of CEOs in the BLS data is understandable, however, once one recognizes that the average firm has only 20.2 workers (Caruso 2015, Appendix Table 1). The 5.2 million firms with fewer than 19 employees, averaging four employees per firm, probably do not have a CEO, nor probably do 2 million of the 2.4 million firms with more than 19 employees.

The reason to focus on the CEO pay of the largest firms is that they employ a large number of workers, are the leaders of the business community, and set the standards for pay in the executive pay market and probably in the nonprofit sector as well (e.g., hospitals, universities). No agency reports how many workers work for very large firms. We do know from the Census data Perry points to (Caruso 2015, Appendix Table 1) that the 18,219 firms in 2012 with at least 500 employees employed 51.6 percent of all employees and their payrolls accounted for 58.1 percent of total payroll (wages times employment). County Business Patterns does provide a data breakout of the 964 firms with at least 10,000 employees, a very unrepresentative group of firms (just 0.017 percent of all firms). However, these large firms provide 27.9 percent of all employment and 31.4 percent of all payroll. In other words, the CEO of the “average U.S. company” about which Perry purports to be interested does not correspond to the CEO of the firm where the “average” or median worker works. This is further confirmed by a new study that reports that the median firm, ranked by employment, has roughly 1,000 workers while the average firm has about 20.

Executives and managers comprise a large portion of those in the top 1 percent of income and the top 1 percent of wage earners. The analysis of tax returns in Bakija and coauthors in 2012 shows the composition of executives in the households with the highest incomes; our tabulation of American Community Survey data for 2009–2011 shows that 41.2 percent (the largest group) of those heading a household in the top 1 percent of incomes were executives or managers. Thus, we know that highly paid managers are the largest group in the top 1 percent and the top 0.1 percent, measured in terms of either wages or household income, and so there are plenty of good reasons to be interested in the pay of executives of large firms. Moreover, the pay of CEOs in the largest firms has grown multiples faster than the wages of other very high earners and hundreds of times faster than the wages these CEOs provide to their workers. There is no big mystery why the public, the media, policymakers, and investors are appropriately focused on the compensation of CEOs in our largest firms.

  • TheBrett

    I’ve posed that question a couple of times on Twitter, so thanks for answering it very well.

    I do have one quibble, but it’s more qualitative. Do you think it’s wise to use 1947-79 as a baseline for executive compensation? CEO performance in top firms in the Postwar Period was not impressive, particularly in industries like Automobiles and Steel.

  • oorang

    I actually think the focus on CEO pay is kind of misplaced. It isn’t like cutting CEO pay boosts the pay of non-CEOs. What it does is boost the income of the investors. Between the CEOs and the investors, the CEO is in some senses the little guy. More CEOs than major investors started from humble beginnings. Individual investors often pull 10, 100 or 1,000 times as much money out of the company than CEOs do. The CEO at least works for it.

    I think the focus needs to be on average pay or maybe median pay vs. investor profits. That’s the real issue- the massive share of productivity that is being siphoned off for investors. For example, look at how the productivity per hour of the average worker is split up-
    In that chart, the CEO pay is actually part of the green slice. It’s the orange slice that is the problem we should be focusing on IMO.

  • PeterBurgess

    My frustration with intellectual analysis is that there is no mechanism to translate the problem identified into solution implemented. A book published in 1992 referenced ‘The New Bureaucracy’ where paper analysis was taking over from real activities. I argue that the only management actions that are efficient in this 21st century are those that increment financial wealth for those already with financial wealth because that happens to be the system of measurement that we are using to manage in the global socio-enviro-economic system. We need to change the way everything is measured so that impact on people and impact on environment are as important as impact on profit. Peter Drucker observed you manage what you measure. I would add that you change the way the game is played when you change the way the game is scored. We need something like Multi Dimension Impact Accounting as a complement to conventional double entry money accounting.
    Peter Burgess …

  • sfe

    Also note that the BLS does not include stock options in its data.
    That is the main reason the BLS data understates the compensation of CEOs by a factor of two or three.