In 2019, CEO compensation at the United States’ top 350 firms grew 14% to $21.3 million on average, according to new analysis by EPI Distinguished Fellow Lawrence Mishel and Research Assistant Jori Kandra. From 1978 to 2019, CEO compensation grew by 1,167%; the compensation of a typical worker, meanwhile, rose just 13.7%. The ratio of CEO-to-worker compensation was 320-to-1 in 2019, up from 293-to-1 in 2018 and a big increase from 21-to-1 in 1965. (The report focuses on a “realized” measure of CEO compensation including exercised stock options, vested stock awards and salary, bonuses, and long-term incentive payouts.)
The authors expose how CEO pay cuts announced during the pandemic, as corporations cut millions of jobs, have been more PR than substance. Corporate executives who volunteer to take salary cuts aren’t making a large sacrifice, because the vast majority of their pay that comes from stock awards and options—salaries comprised only about 7% of compensation. Given that the inflation-adjusted growth of the stock market, as reflected in the S&P 500, was about 8% higher in mid-2020 (the last half of June and first half of July) than it was in 2019, it is reasonable to expect a further significant boost in CEO compensation in 2020.
“While wage growth for the majority of Americans has remained relatively stagnant for decades, CEO compensation continues to balloon,” said Mishel. “This has fueled the spectacular income growth of the top 0.1% and 1.0% and the growth of income inequality overall. CEOs offering salary cuts during the coronavirus pandemic yield press releases but no real progress toward reducing inequality and raising workers’ wages.”
Over the last several decades, CEO pay has grown much faster than corporate profits, the pay of the top 0.1% of wage earners, and the wages of college graduates. CEO pay largely corresponds with the overall stock market rather than being tied to the performance of individual firms. Mishel and Kandra argue this is evidence that CEOs are paid more because of the power to set their own pay through conflicted boards of directors—not because they are more productive or have special talents or more education. Thus, if CEOs earned substantially less or were taxed more, there would be no adverse impact on output or employment.
“This huge growth in CEO pay is not a reflection of the market for talent,” said Kandra. “We know this because CEO compensation has grown more than three times faster than the growth of earnings for the top 0.1% of earners, which was 337% over the same period. This means that CEO pay can be curbed to reduce the growing gap between the highest earners and everyone else with little, if any, impact on the output of the economy or firm performance.”
In recent years, CEO compensation has been driven by stock awards and cashed-in stock options. Vested stock awards alone accounted for nearly half of all CEO compensation in 2019.
The authors name several policy solutions that would reduce the ability of CEOs to extract increasingly higher pay—without hurting the overall economy—including:
- Reinstating higher marginal income tax rates at the very top of the income ladder
- Setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation
- Capping compensation and tax anything over the cap
- Allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation
Because the decision to realize, or cash in, stock options tends to fluctuate with current and potential stock market trends (as people tend to cash in their stock options when it is most advantageous to do so), Mishel and Kandra also look at another measure of CEO compensation, tracking the value of stock options and stock awards at the time they are granted. This measure, “CEO granted compensation,” was $14.5 million in 2019, up 8.6% from 2018 and 1,033% greater than in 1978.
Each measure of CEO compensation incorporates the value of salary, bonuses, and long-term incentive payouts. Methodological details for the construction of EPI’s CEO compensation measures are provided in the paper and comparisons to the pay of workers, and benchmarking to other studies can be found in a detailed methodological appendix on epi.org.