The Securities and Exchange Commission (SEC), as part of its implementation of the 2010 Dodd-Frank law, has proposed a new rule requiring publicly owned firms to disclose the ratio of CEO compensation to the compensation of their median worker. Understandably, this has generated new interest in the gap between CEO and worker pay.
As EPI noted in this recent paper on the ratio of CEO to average worker pay, from 1978–2011, CEO compensation grew more than 876 percent, more than double the growth of the stock market and remarkably faster than the growth of annual compensation of a typical private-sector worker, up a meager 5.4 percent. The increased divergence between CEO pay and a typical worker’s pay over time is revealed in the CEO-to-worker compensation ratio, as shown in the figure. This ratio measures the gap between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.
Though lower than in other years in the last decade following the stock market bubble, the CEO-to-worker compensation ratio in 2012 of 273 was far above that of the late 1990s and 14 times the ratio of 20.1 in 1965. This illustrates that CEOs have fared far better than the typical 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. This extraordinary growth of pay for executives has been a major factor fueling the growth of incomes for the top one percent.
EPI’s estimates provide a roadmap to the history of the CEO-to-worker pay ratio though they differ in important ways from the ratio that firms will disclose under the proposed rule. First, since data on worker pay for particular firms are not available our estimates report worker pay of domestic employees in the firms’ key industry. Second, our measure clearly understates the ratio because our measure of a typical worker’s pay (based largely on the average hourly wage of production and nonsupervisory workers) is 21 percent greater than the median wage, which the proposed rule requires as the point of comparison. Third, our measure also understates the ratio because it compares CEO pay to the pay of a full-time, full-year worker while the rule focuses on all workers, including those working part time. Last, EPI’s measure reflects the ratio to the pay of domestically employed workers while the proposed rule focuses on the pay of a firm’s workers in all nations.
This overall ratio is computed in two steps. The first step is to compute, for each of the largest 350 firms, the ratio of the CEO’s compensation to the annual compensation of workers in the key industry of their firm (data on the pay of workers in any particular firm are not available). The second step is to average that ratio across all the firms. The data are the resulting ratios in every year. The trends prior to 1992 are based on the changes in average CEO and private-sector worker compensation.
The figure uses measures of CEO compensation, which incorporates the value of realized stock options (by exercising stock options available) and the sum of salary, bonus, restricted stock grants, and long-term incentive payouts. Worker compensation is the full-time, full-year annual wage of production and nonsupervisory workers plus benefits. Complete methodological detail is provided in this working paper.