CEO pay has skyrocketed since 1978

EPI’s new CEO pay data page details the latest information on CEO pay, the sources of CEO pay, and how CEO pay compares with what typical workers are paid, the stock market, and the pay of other highly paid workers. The new web page also provides historical data on each measure as far back as 1965.

The data show that CEOs are paid much more today than they were in the mid-1990s and many times what they earned in the 1960s or 1970s. In fact, realized compensation for CEOs is now 1,094% higher than it was in 1978. Over the same period, the pay for typical workers only increased 26%. As a result, the CEO-to-worker compensation ratio grew tremendously—nearly tenfold—from 31-to-1 in 1978 to 281-to-1 in 2024 (see Figure A).

Figure A

Our new analysis on the CEO pay data page illustrates how CEO pay and the CEO-to-worker pay ratio have skyrocketed no matter how you measure CEO pay. Using alternative measures—such as smoothing over three years, dropping outliers, and measuring at the median—the growth in CEO compensation continues to far outpace the growth in wages for typical workers. Our estimates suggest that the CEO-to-worker pay ratio in 2024 ranges from 169-to-1 to 380-to-1, depending on how it’s measured. Even at “just” 169-to-1, the ratio of median CEO compensation to typical worker pay grew more than threefold since 1992, the earliest year that particular measure is available.

Stock-related components constitute a large and growing share of total CEO compensation. Stock-related pay (exercised stock options and vested stock awards) averaged $18.2 million in 2024 and accounted for 79% of average realized CEO compensation. However, as shown in Figure B, the composition of those stock-related components has been shifting away from the use of stock options and toward stock awards over time. This is a potentially promising development because stock awards may better align CEO pay to longer-term incentives. In 1992, stock options accounted for 85% of stock-related pay in realized CEO compensation. By 2024, stock options made up only 31%, with vested stock awards accounting for the rest.

Figure B

While CEOs are clearly paid far more than the typical worker, CEO pay is excessive even relative to other extraordinarily privileged actors in the economy. Between 1965 and 1978, the ratio of CEO pay to top 0.1% wages averaged 2.6, so the average CEO at large firms was paid 2.6 times as much as the average top 0.1% earner (of which top CEOs are a part). This CEO-to-top-0.1% pay ratio has risen enormously in the past five decades. In 2023 (the last year available for the top 0.1% data series), this ratio was 7.5, meaning that CEOs were paid 7.5 times as much as even the most privileged 0.1% of workers in the economy. This is an extremely large change: It essentially means that the relative pay of CEOs increased by an amount equal to the total annual wages of nearly five of these very-high-wage earners. A one-point rise in the ratio is the equivalent of the average CEO earning an additional amount equal to that of the average earnings of someone in the top 0.1%.

EPI’s new CEO pay data page provides the underlying pay data for the pay of both CEOs and the average of top 0.1% in every year the data are available since 1965.

Rising CEO pay does not reflect a rising value of skills or contributions 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. Tax policy can reduce the incentives for executives to push for such high pay and higher tax rates on income derived from wealth-holding would allow policymakers to claw back some of the past outsized gains CEOs have made. Worker representatives on corporate boards, an increase in unionization, and requiring shareholder votes on top executives’ compensation can also serve to restrain such exorbitant pay.

Even modest changes in corporate governance that allow shareholders more power to restrain CEO pay can help: The pronounced shift in the composition of CEO pay away from stock options was almost certainly driven in large part by a 2006 decision by the Financial Accounting Standards Board that the value of stock options needed to be reported to shareholders in public documents. Before that change, firms treated the options they granted to CEOs as essentially free, even as these options diluted the value of other shareholders’ wealth. This modest change—just requiring a reporting of the value of stock options—has led to a change in the composition of CEO pay that is useful on its own. And the sharp reduction in options grants since 2006 likely partially explains why CEO pay growth has been slower since then. In short, policy matters along many margins.

Key findings

• Growth of CEO compensation (1978–2023). Since CEO pay is mostly stock based—and the value of stocks changes frequently—calculating it is not entirely straightforward. We use two measures to give a fuller picture: a backward-looking measure—realized compensation—and a forward-looking measure—granted compensation. Realized compensation of the top CEOs shot up 1,085% from 1978 to 2023 (adjusting for inflation), compared with the slow 24% growth in a typical worker’s annual compensation. CEO granted compensation rose 932% from 1978 to 2023.
• Changes in the CEO-to-worker compensation ratio (1965–2023). The realized CEO-to-worker compensation ratio was 290-to-1 in 2023, in stark contrast to the 21-to-1 ratio in 1965. Over the last two decades, the ratio has been far higher than at any point from the 1960s to the early 1990s. The granted CEO-to-worker compensation ratio was to 192-to-1 in 2023—significantly lower than its peak of 398-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. While stock-related components constitute a large and growing share of total compensation, the composition of CEO compensation is shifting away from the use of stock options and toward stock awards—a promising move to align CEO pay to longer-term incentives. In 2006, stock options accounted for just over 70% of stock-related pay in realized CEO compensation. But in 2023, stock options made up only 22%, with vested stock awards accounting for the rest. Stock-related pay (exercised stock options and vested stock awards) averaged $16.7 million in 2023 and accounted for 77.6% of average realized CEO compensation.
• Changes in the CEO-to-top-0.1% compensation ratio. CEO compensation has been breaking away from that of other very highly compensated workers. Over the last three decades, compensation grew far faster for CEOs than it did for the top 0.1% of wage earners (those earning more than 99.9% of wage earners). CEO compensation in 2022 (the latest year for which data on top 0.1% wage earners are available) was 9.4 times as high as wages of the top 0.1% of wage earners, a ratio 6.8 points greater than the 2.6-to-1 average CEO-to-top-0.1% ratio over the 1965–1978 period.
• Implications of the growth of the CEO-to-top-0.1% compensation ratio. The fact that CEO compensation has grown much faster than the pay of the top 0.1% 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, but instead 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—thanks to 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.
• Cost of rising inequality for most workers. If very high earners hadn’t pulled away so dramatically, there would be room for broader-based wage growth for the rest of the workforce. Most of the rise in inequality over the last four decades has redistributed wages away from most workers.

Measuring CEO compensation

We focus on the average compensation of CEOs at the 350 largest publicly owned U.S. firms (firms that sell stock on the open market) by revenue. Our source of data is the S&P Compustat ExecuComp database for the years 1992 to 2023, and survey data published by The Wall Street Journal for selected years back to 1965. We maintain the sample size of 350 firms each year when using the Compustat ExecuComp data.2

Two ways of measuring CEO compensation

We use two measures of CEO compensation: one based on compensation as “realized,” and the other based on compensation as “granted.” Both measures include the same measures of salary, bonuses, and long-term incentive payouts. The difference lies in how each measure treats stock awards and stock options—major components of CEO compensation that change value from when they are first provided, or granted, to when they are realized.

The realized measure of compensation includes the value of stock options when they are actually realized or exercised, capturing the change in value from when the options were granted to when the CEO invokes the options, usually after the stock price has risen and options value has increased. The realized compensation measure also values stock awards at their value when vested (usually three years after being granted), capturing any change in the stock price as well as additional stock awards provided as part of a performance award.

The granted measure of compensation values stock options and restricted stock awards by their “fair value” when granted. This fair value must be estimated based on several assumptions about the future path of stock prices, interest rates, and other variables. Compustat estimates of the fair value of options and stock awards as granted are derived from the Black-Scholes model. For details on the construction of these measures and benchmarking to other studies, see Sabadish and Mishel (2013).

In some sense, realized measures of pay are backward-looking, while granted measures are forward-looking. Realized measures of stock-related pay in 2023 are essentially measuring how much money CEOs were able to bring home based (largely) on the past year’s stock options and awards. Granted measures of stock-related pay in 2023 are essentially estimating how much new options and awards are likely to pay off in future years. Because neither measure perfectly maps onto a measure of how much a CEO “earned” in a single particular year, reporting both can be useful for understanding the full picture.

Trends in CEO compensation

Table 1 presents the trends in inflation-adjusted realized and granted CEO compensation for selected years from 1965 to 2023 (columns 1 and 2).3 Real changes in the stock market are as measured by the S&P 500 Index and the Dow Jones Industrial Average in columns 3 and 4. In general, CEO compensation follows the movement of the stock market

The last year of data saw a striking exception to that phenomenon: The drop in CEO compensation from 2022 to 2023 was large compared with very little change in the stock market over that period. Realized CEO compensation (reported in Table 1) declined by 19.4% to $22.2 million from 2022 to 2023.4 The granted measure of CEO compensation, which values stock options granted in 2023 (not those exercised), also fell by 14.1%. While it is somewhat puzzling for CEO pay to fall as the stock market largely held steady, it’s possible that the shift in stock-related pay away from options played a role, and this overall divergence will likely turn around with the stock market gains so far in 2024.

Longer-term trends in CEO compensation

Table 1 also presents the longer-term trends in CEO compensation for selected years from 1965 to 2023.5 Our discussion of longer-term trends focuses mostly on the realized compensation measure of CEO compensation—the measure preferred in most economic analyses. In general, CEO compensation follows the movement of the stock market but tends to exceed even the largest stock market gains.

Table 1

As mentioned above, realized CEO compensation has, in general, risen and fallen along with the S&P 500 Index over the last five and a half decades. But the period from 1965 to 1978 is an exception: Although the stock market fell by roughly half between 1965 and 1978, realized CEO compensation increased by 79.9%.

To assess the role of CEO compensation in the overall increase in income and wage inequality of the last four decades, it is best to gauge growth since 1978.6 For the period from 1978 to 2023, realized CEO compensation increased 1,085%—77% faster than stock market growth (based on the growth of the S&P 500) and substantially faster than the 24% growth in the typical worker’s compensation over the same period. CEO granted compensation grew 932% over this period.

Trends in the CEO-to-worker compensation ratio

Table 1 allows us to compare CEO compensation with that of a typical worker by showing the average annual compensation (wages and benefits of a full-time, full-year worker) of private-sector production/nonsupervisory workers (a group covering more than 80% of payroll employment; see Gould 2020) in column 5.

From 1992 onward, column 6 of the table also identifies the average annual compensation of production/nonsupervisory workers in the key industries of the firms included in the sample. We take this compensation as a proxy for typical workers’ pay in these firms and use it to calculate the CEO-to-worker compensation ratio for each firm.

Columns 7 and 8 present trends in the ratio of CEO-to-worker compensation, using both measures of CEO compensation. We compute this ratio, which illustrates the increased divergence between CEO and worker pay over time, in two steps:

• The first step is to construct, for each of the 350 largest U.S. firms, the ratio of the CEO’s compensation to the annual average compensation of production and nonsupervisory workers in the key industry of the firm (data on the pay of workers at individual firms are not available).7
• The second step is to average that ratio across all 350 firms. Note that trends before 1995 are based on the ratio of average top-company CEO pay to the compensation of economywide (not industry-specific) private-sector production/nonsupervisory workers.

CEO-to-worker compensation trends are depicted in Figure A.

Figure A

As Table 1 and Figure A show, using the realized measure of CEO compensation, CEOs of major U.S. companies earned 21 times as much as the typical worker in 1965. This ratio grew to 31-to-1 in 1978 and 61-to-1 by 1989. It surged in the 1990s, hitting 384-to-1 in 2000, at the end of the 1990s recovery and at the height of the stock market bubble.8

The fall in the stock market after 2000 reduced CEO stock-related pay, such as realized stock options, and caused CEO compensation to tumble in 2002 before beginning to rise again in 2003. Realized CEO compensation recovered to a level of 330 times worker pay by 2007, still below its 2000 level. The financial crisis of 2008 and accompanying stock market decline reduced CEO compensation between 2007 and 2009, and the CEO-to-worker compensation ratio fell in tandem.

Over the 2009–2021 period, another surge in realized CEO compensation brought the ratio to 405-to-1, a historic high. The ratio experienced significant declines between 2021 and 2023, as CEO pay fell. In 2023, the CEO-to-worker compensation ratio was 290-to-1. Even with the recent losses, the 2023 ratio is still far higher than it was in the 1960s, 1970s, 1980s, and the early 1990s.

The pattern using the granted measure of CEO compensation is similar. The CEO-to-worker pay ratio peaked in 2000 at 398-to-1, even higher than the 384-to-1 ratio using the realized compensation measure. By 2023, the granted compensation ratio decreased to 192-to-1. This level is far lower than its peak in 2000, but still much greater than the ratios in 1995 (131-to-1), 1989 (45-to-1), or 1965 (15-to-1).

The extraordinarily high level of the CEO-to-worker compensation ratio reflects the strikingly different trajectory of CEO pay compared with typical worker pay over the past 40 years. On the one hand, there has been little growth in the compensation of a typical worker since the late 1970s: It has grown just 24.0% over the 45 years from 1978 to 2023, despite a corresponding growth of net economywide productivity of 74.8% (EPI 2024). Meanwhile, the 1,085% growth in realized CEO compensation from 1978 to 2023 (excluding 1979, since there are no data for that year) exceeded the growth in productivity in that period.

Changes in the composition of CEO compensation

Stock-related components of CEO compensation constitute a large and increasing share of total compensation. Realized stock awards and stock options made up 70.2% of total CEO compensation in 2006 ($15.1 million out of $21.5 million) and 76.6% of total compensation in 2023 ($17.0 million out of $22.2 million; not shown in chart). The growth of these stock-related components from 2006 to 2022 explains over 100% of the total growth in CEO realized compensation over this period.9 Of the stock-related components of compensation, stock awards make up a growing share, while the share of stock options in CEO compensation packages has decreased over time.

There is a simple logic behind companies’ decisions to shift from stock options to stock awards in CEO compensation packages, as Clifford (2017) explains. With stock options, CEOs can only make gains: They realize a gain if their company’s stock price rises beyond the price of the initial options granted, and they lose nothing if the stock price falls. Having nothing to lose—but potentially a lot to gain—might lead options-holding CEOs to take excessive risks to bump up their company’s stock price to an unsustainable short-term high.

Stock awards, on the other hand, likely promote better long-term alignment of a CEO’s goals with those of shareholders. A stock award has a value when granted or vested and can increase or decrease in value as the firm’s stock price changes. If stock awards have a lengthy vesting period of three to five years, then the CEO has an interest in lifting the firm’s stock price over that period while being mindful to avoid any implosion in the stock price—to maintain the value of what they have. In some sense, the shift from options to awards might represent a small glimmer of hope that CEO labor markets are getting a bit less dysfunctional (though there is obviously a long way to go).

CEO pay is excessive even relative to other extraordinarily privileged actors in the economy

This section highlights how distorted CEO pay is, even compared with the most privileged workers in the U.S. economy—the top 0.1%. CEO compensation has grown a great deal since 1965 and so has the pay of other high-wage earners.

To some analysts, this suggests that the dramatic rise in CEO compensation has been driven largely by the demand for the skills of CEOs and other highly paid professionals. In this interpretation, CEO compensation is being set by the market for “skills” or “talent,” not by managerial power or the ability of CEOs to extract economic rents (income in excess of their contribution to actually producing it). The “market for talent” argument is based on the premise that it is other professionals, too, not just CEOs, who are seeing a generous rise in pay. The most prominent example of this argument comes from Kaplan (2012a, 2012b), who claims that a stable ratio of CEO-to-top 0.1% pay indicates that market power is not operating uniquely in CEO pay markets.

This lies in contrast to the explanation offered by Bebchuk and Fried (2004) and Clifford (2017) who claim that the long-term increase in CEO pay is a result of managerial power. Similarly, Bivens and Mishel (2013) argue that CEO pay gains are not the result of a competitive market for talent, but rather reflect the power of CEOs to extract concessions from corporate boards. A growing CEO-to-top-0.1% pay ratio would indicate that the scope for this unique exercise of market power in CEO labor markets is large.

To test the alternative theories, we compare CEO-to-top 0.1% pay ratios beginning in 1965, shown in Figure B. In 2022 (the last year available for the top 0.1% data series), this ratio was 9.4, meaning that CEOs made over 9 times as much in salary as even the most privileged 0.1% of workers in the economy. This 9.4 ratio in 2022 was 6.8 points higher than the historical average of 2.6 over the 1965–1978 period. This is a large change, meaning that the relative pay of CEOs increased by an amount equal to the total annual wages of nearly seven of these very high wage earners.10

CEO pay rising far faster than that of the top 0.1% suggests that market power is uniquely operating in CEO pay markets and rising pay is not a result of a competitive market for talent.

Figure B

The extremely rapid growth of CEO compensation compared with the earnings of the top 0.1% of wage earners does not mean that the top 0.1% fared poorly. In fact, the very highest earners—those in the top 0.1% of all earners—saw their annual earnings (including realized stock options and vested stock awards) grow fantastically, though far less than the compensation of the CEOs of large firms (which are also a very small subset of the top 0.1%). Top 0.1% annual earnings grew a healthy 377.7% from 1978 to 2022, though that was just a small fraction of the 1,370.4% growth of realized CEO compensation achieved between 1978 and 2022 (strict comparability on the years 1979 to 2023 is not available because we do not have CEO data for 1979 nor top 0.1% data for 2023).

Since CEO pay growing far faster than the pay of other high earners is evidence of the presence of rents, one can conclude that today’s top executives are collecting substantial rents, claiming income that greatly exceeds their contribution to producing it. This means that if CEOs were paid less, there would be no loss of productivity or output in the economy.

The large discrepancy between the pay of CEOs and other very-high-wage earners also casts doubt on the claim that CEOs are being paid these extraordinary amounts because of their special skills and the market for those skills. It is unlikely that the skills of CEOs of very large firms are so outsized and disconnected from the skills of other high earners that they propel CEOs past most of their cohort in the top one-tenth of 1%. For everyone else, the distribution of skills, as reflected in the overall wage distribution, tends to be much more continuous, so this discontinuity is evidence that factors beyond skills drive the compensation levels of CEOs.

The stock market and CEO pay

There is normally a tight relationship between overall stock prices and CEO compensation. Some commentators draw on this regularity to claim that CEOs are being paid for their performance since, in the commentators’ view, the goal of CEOs is to raise their companies’ stock prices.

However, the stock–CEO compensation relationship does not necessarily imply that CEOs are enjoying high and rising pay because their individual productivity is increasing (for example, because they head larger firms, have adopted new technology, or for other reasons). CEO compensation often grows strongly when the overall stock market rises, and individual firms’ stock values are swept up in this wake. This is a marketwide phenomenon, not one based on the improved performance of individual firms.

Most CEO pay packages allow pay to rise whenever the firm’s stock value rises. In other words, CEOs can cash out stock options regardless of whether the rise in the firm’s stock value was exceptional relative to comparable firms in the same industry. Similarly, vested stock awards increase in value when the firm’s stock price rises in simple correspondence to a marketwide escalation of stock prices. If corporate taxes are reduced and profits rise accordingly, leading to higher stock prices, is it accurate to say that CEOs have made their firms perform better?

The connection between CEO pay and overall inequality

Some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no real consequences for most workers. But on the contrary, the escalation of CEO compensation— and of executive compensation more generally—has likely helped fuel the wider growth of top 1% and top 0.1% incomes, contributing to widespread inequality.

Our data apply to the CEOs of the very largest firms. We presume that these CEOs set the pay standards followed by other executives—of the largest publicly owned firms, of smaller publicly owned firms, of privately owned firms, and of major nonprofit firms (hospitals, universities, charities, etc.). If so, then CEO compensation is indeed a nontrivial driver of top incomes.

Another implication of rising pay for CEOs and other executives is that it reflects income that would otherwise have accrued to others instead of being concentrated at the highest level. What these executives earned was not available for broader-based wage growth for other workers (Bivens and Mishel 2013). It is useful, in this context, to note that wages for the bottom 90% would be 16% higher today had wage inequality not increased between 1979 and 2022.11

Most of the rise in inequality took the form of redistributing wages away from the bottom 90%. This group’s share of total wage income fell from 69.8% in 1979 to 60.1% in 2022. Most of the loss experienced by the bottom 90% went to the top 1%, whose wage share grew substantially from 7.3% to 12.9% in these same years. And even among this gain going to the top 1%, most of it went to the top 0.1%, who saw their share of overall wage income nearly triple from 1.6% to 4.6% between 1979 and 2022. In other words, the bottom 90% lost 9.7% of total wage income between 1979 and 2022, and nearly 60% of this loss (5.6 of 9.7 percentage points) went to the top 1%, while 30% (or 3.0 of 9.7 percentage points) went to just the top 0.1%.

Policy recommendations: Reversing the trend

Several policy options could reverse the trend of excessive executive pay and broaden wage growth. Ideally, tax reforms would be paired with changes in corporate governance:

• Implementing higher marginal income tax rates at the very top would limit rent-seeking behavior and reduce the incentives for executives to push for such high pay.
• Setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation is another option. Clifford (2017) recommends setting a cap on executive compensation and taxing companies on any amount over the cap, similar to the way baseball team payrolls are taxed when salaries exceed a cap. One key consideration in making policies like this work concerns “fissuring”—the practice of spinning off the lower-paid workers in a given firm and using contracted third-party service providers to replace these functions (often rehiring the exact same workers but now no longer as permanent employees of the old firm). Such fissuring would boost firm-specific measures of typical workers’ pay and reduce the CEO-to-worker pay ratio, without changing any economic reality. The newly contracted workers would not necessarily see any higher pay, and the CEOs would not need to accept lower pay. This type of fissuring is endemic in the U.S. economy and is a policy obstacle to many efforts to constrain specific firms’ behavior through incentives like this.

Baker, Bivens, and Schieder (2019) review policies that would restrain CEO compensation and explain how tax policy and corporate governance reform can work in tandem:

Tax policy that penalizes corporations for excess CEO-to-worker pay ratios can boost incentives for shareholders to restrain excess pay, [but] to boost the power of shareholders [to restrain pay], fundamental changes to corporate governance have to be made. One key example of such a fundamental change would be to provide worker representation on corporate boards.

Given the vital importance of changing shareholders’ ability to restrain pay (not just their incentive to do so), another policy that could potentially limit executive pay growth is greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

The CEOs examined in this report head large firms. These firms, almost by definition, enjoy a degree of market power that some studies suggest has grown in recent decades. It seems that CEOs and other executives may have been prime beneficiaries of these firms’ greater market power. Using the tools of antitrust enforcement and regulation would help to restrain these firms’ market power. This would not only promote economic efficiency and competition but might help restrain executive pay as well.

Notes

1. For the pay of the typical worker, we use average compensation (wages and salaries plus benefits) of a full-time, full-year production or nonsupervisory worker (a group that makes up about 80% of the private-sector workforce).

2. In earlier reports, our sample for each year was sometimes fewer than 350 firms because some of these large firms did not have the same CEO for the entire (or most of the) year or the compensation data were not yet available. We now examine the top 350 firms with the largest revenues each year for which there are data to not let changes in sample size affect annual trends.

3. Authors’ analysis of the Compustat ExecuComp data.

4. Note that while we report executive compensation in millions in the text, and we round numbers to the nearest thousand in Table 1, dollar and percent changes are calculated using unrounded data.

5. We choose which years to present in the table based in part on data availability. Where possible, we choose cyclical peaks (years of low unemployment). It may be useful to note that our data here do not match earlier versions of this research (for example, see Table 1 in Bivens and Kandra 2023). While there are many reasons the data vary from year to year—primarily changes in the list of top 350 public firms by sales—another difference is that we are now using a chained Consumer Price Index to measure inflation because it better captures consumers’ ability to substitute away from goods and services with relatively faster price growth.

6. A better comparison would be to the low-unemployment year of 1979, but those data are not available.

7. There are a limited number of firms, which existed only for certain years between 1992 and 1996, for which a North American Industry Classification System (NAICS) value is unassigned. This makes it impossible to identify the pay of the workers in the firm’s key industry. These firms are therefore not included in the calculation of the CEO-to-worker compensation ratio.

8. As noted earlier, it may seem counterintuitive that the two ratios for 2000 are different from each other when the average CEO compensation is the same. It is important to understand that (as described later in this report) we do not create the ratio from the averages; rather we construct a ratio for each firm, and then average the ratios across firms.

9. The managerial power view asserts that CEOs have excessive, noncompetitive influence over the compensation packages they receive. Rent-seeking behavior is the practice of manipulating systems to obtain more than one’s fair share of wealth—that is, finding ways to increase one’s own gains without actually increasing the productive value one contributes to an organization or the economy.

10. A one-point rise in the ratio is the equivalent of the average CEO earning an additional amount equal to that of the average earnings of someone in the top 0.1%.

11. This follows from the fact that from 1979 to 2022, annual earnings for the bottom 90% rose by 32.9%, while the average growth across all earners was 54.3% (Gould and Kandra 2023).

Acknowledgments

The authors thank the Stephen M. Silberstein Foundation for its generous support of this research. Steven Balsam has provided useful advice on data construction and interpretation over the years. He is an accounting professor at Temple University and author of Executive Compensation: An Introduction to Practice and Theory (2007) and Equity Compensation: Motivations and Implications (2013). Steven Clifford, author of The CEO Pay Machine: How It Trashes America and How to Stop It (2017), has also provided technical advice. Clifford served as CEO for King Broadcasting Company from 1987 to 1992 and National Mobile Television from 1992 to 2000 and has been a director of 13 public and private companies. The authors also wish to acknowledge Larry Mishel, former EPI president and economist, who was valuable in setting the foundation for EPI’s work on CEO pay.

References

Baker, Dean, Josh Bivens, and Jessica Schieder. 2019. Reining in CEO Compensation and Curbing the Rise of Inequality. Economic Policy Institute, June 2019.

Bebchuk, Lucian, and Jesse Fried. 2004. Pay Without Performance: The Unfulfilled Promise of Executive Remuneration. Cambridge, Mass.: Harvard Univ. Press.

Bivens, Josh, and Lawrence Mishel. 2013. “The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes.” Economic Policy Institute Working Paper no. 296, June 2013.

Bivens, Josh, and Jori Kandra. 2023. CEO Pay Slightly Declined in 2022: But It Has Soared 1,209.2% Since 1978 Compared With a 15.3% Rise in Typical Workers’ Pay. Economic Policy Institute, September 2023.

Bureau of Economic Analysis (BEA). Various years. National Income and Product Accounts (NIPA) Tables [online data tables]. Tables 6.2C, 6.2D, 6.3C, and 6.3D.

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Clifford, Steven. 2017. The CEO Pay Machine: How It Trashes America and How to Stop It. New York: Penguin Random House.

Compustat. Various years. ExecuComp [commercial database].

Economic Policy Institute (EPI). 2024. “The Productivity–Pay Gap.” Economic Policy Institute website, August 2024.

Federal Reserve Bank of St. Louis. Various years. Federal Reserve Economic Data (FRED) [database].

Gould, Elise. 2020. “The Labor Market Continues to Improve in 2019 as Women Surpass Men in Payroll Employment, but Wage Growth Slows.” Working Economics Blog (Economic Policy Institute), January 10, 2020.

Gould, Elise, and Jori Kandra. 2023. “Wage Inequality Fell in 2022 Because Stock Market Declines Brought Down Pay of the Highest Earners” Working Economics Blog (Economic Policy Institute), December 11, 2023.

Kaplan, Steven N. 2012a. “Executive Compensation and Corporate Governance in the US: Perceptions, Facts, and Challenges.” Martin Feldstein Lecture, National Bureau of Economic Research. Filmed July 10, 2012, in Washington, D.C. 

Kaplan, Steven N. 2012b. “Executive Compensation and Corporate Governance in the US: Perceptions, Facts and Challenges.” National Bureau of Economic Research Working Paper no. 18395, September 2012.

Mishel, Lawrence and Jori Kandra. 2020. CEO Compensation Surged 14% in 2019 to $21.3 Million: CEOs Now Earn 320 Times as Much as a Typical Worker. Economic Policy Institute, August 2020.

Sabadish, Natalie, and Lawrence Mishel. 2013. “Methodology for Measuring CEO Compensation and the Ratio of CEO-to-Worker Compensation, 2012 Data Update.” Economic Policy Institute Working Paper no. 298, June 2013.

Securities and Exchange Commission (SEC). 2015. “SEC Adopts Rule for Pay Ratio Disclosure: Rule Implements Dodd-Frank Mandate While Providing Companies with Flexibility to Calculate Pay Ratio” (press release). August 5, 2015.

Economic Policy Institute researchers tracked the growing list of states moving to weaken child labor laws, and readers flocked to our research on the topic, making it the most read EPI report published this year.

The economics of abortion bans, teacher pay, and a host of other issues were also among the most read content on our website.

Here are the top five reports and the top five blog posts published this year.

Reports

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Key findings

• 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% from 1978 to 2022 (adjusting for inflation). Top CEO compensation grew roughly 28.1% faster than stock market growth during this period and far eclipsed the slow 15.3% growth in a typical worker’s annual compensation. CEO granted compensation rose 1,046.9% 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% of stock-related pay in realized CEO compensation. But in 2022, stock options were only 34% 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% of average realized CEO compensation.
• Changes in the CEO-to-top-0.1% 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% of wage earners (those earning more than 99.9% of wage earners). CEO compensation in 2021 (the latest year for which data on top 0.1% wage earners are available) was 7.68 times as high as wages of the top 0.1% of wage earners, a ratio 4.1 points greater than the 3.61-to-1 average CEO-to-top-0.1% ratio over the 1951–1979 period.
• Implications of the growth of the CEO-to-top-0.1% compensation ratio. The fact that CEO compensation has grown much faster than the pay of the top 0.1% 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% 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% compensation (1979–2021). Even though CEO compensation grew much faster than the earnings of the top 0.1% of wage earners, that doesn’t mean the top 0.1% fared poorly. Quite the contrary. The inflation-adjusted annual earnings of the top 0.1% grew 465% from 1979 to 2021. CEO compensation, however, grew more than 2.5 times as fast!

Measuring CEO compensation

We focus on the average compensation of CEOs at the 350 largest publicly owned U.S. firms (those firms that sell stock on the open market) by revenue. Our source of data is the S&P Compustat ExecuComp database for the years 1992 to 2022 and survey data published by The Wall Street Journal for selected years back to 1965. We maintain the sample size of 350 firms each year when using the Compustat ExecuComp data.2

A note about the Compustat data

It is worth noting some complexity of the Compustat data at the outset. Compustat tracks data (including measures of CEO compensation) for all publicly traded firms in the United States across a range of years (we use it back to 1992 and find it reliable since that year). But public companies sometimes move out of the data universe of publicly traded firms. They might go private, go out of business entirely, or be bought by another firm. When a firm stops being public, it does not simply drop out of the sample from that point on; it is also removed from previous years’ samples.

Optimally, we would like the Compustat data to provide information on the largest 350 firms that were public in a given year. Instead, the data provide information on the largest 350 firms that were public in a given year and that continue to be public according to the most recent data. This explains why some of our data—even for years relatively far in the past—changes with each new iteration of this report.

Further, even the pre-1992 data that we use rely on a procedure that “backcasts” Compustat to pre-1992 data that originate from other sources. Therefore, even the pre-1992 data can change with each successive round of Compustat.

In practice, the degree of change to previous years’ data caused by this reshuffling of firms in the Compustat universe is quite small, but it is not zero.

Two ways of measuring CEO compensation

We use two measures of CEO compensation, one based on compensation as “realized” and the other based on compensation as “granted.” Both measures include the same measures of salary, bonuses, and long-term incentive payouts. The difference lies in how each measure treats stock awards and stock options, major components of CEO compensation that change value from when they are first provided, or granted, to when they are realized.

The realized measure of compensation includes the value of stock options when they are actually realized or exercised, capturing the change in value from when the options were granted to when the CEO invokes the options, usually after the stock price has risen and the options values have increased. The realized compensation measure also values stock awards at their value when vested (usually three years after being granted), capturing any change in the stock price as well as additional stock awards provided as part of a performance award.

The granted measure of compensation values stock options and restricted stock awards by their “fair value” when granted. This fair value must be estimated given a number of assumptions about the future path of stock prices, interest rates, and other variables. Compustat estimates of the fair value of options and stock awards as granted are derived from the Black-Scholes model. For details on the construction of these measures and benchmarking to other studies, see Sabadish and Mishel 2013.

In some sense, realized measures of pay are backward-looking, while granted measures are forward-looking. Realized measures of stock-related pay in 2022 are essentially measuring how much money CEOs were able to bring home based (largely) on the past year’s stock options and awards. Granted measures of stock-related pay in 2022 are essentially measuring estimates of how much new options and awards are likely to pay off in future years. Because neither measure perfectly maps onto a measure of how much a CEO “earned” in a single particular year, reporting both can be useful.

Analysis

Trends in CEO compensation growth

This section examines several decades of available data to identify historical trends in CEO compensation. Stock-related components have constituted a growing share of total CEO compensation over time. Lately, there has been a shift away from stock options to stock awards—a small sign that perhaps CEO labor markets are getting slightly less dysfunctional on the margins.

Composition of CEO compensation

Stock-related components of CEO compensation constitute a large and increasing share of total compensation. Realized stock awards and stock options made up 70.2% of total CEO compensation in 2006 ($15.1 million out of $21.6 million) and 81.3% of total compensation ($20.5 million out of $25.2 million) in 2022 (not shown in chart). The growth of these stock-related components from 2006 to 2022 explains over 100% of the total growth in CEO realized compensation over this period.3 Of the stock-related components of compensation, stock awards make up a growing share, while the share of stock options in CEO compensation packages has decreased over time.

There is a simple logic behind companies’ decisions to shift from stock options to stock awards in CEO compensation packages, as Clifford (2017) explains. With stock options, CEOs can make only gains: They realize a gain if their company’s stock price rises beyond the price of the initial options granted, and they lose nothing if the stock price falls. The fact that they have nothing to lose—but potentially a lot to gain—might lead options-holding CEOs to take excessive risks to bump up their company’s stock price to an unsustainable short-term high.

Stock awards, on the other hand, likely promote better long-term alignment of a CEO’s goals with those of shareholders. A stock award has a value when given or vested and can increase or decrease in value as the firm’s stock price changes. If stock awards have a lengthy vesting period of three to five years, then the CEO has an interest in lifting the firm’s stock price over that period while being mindful to avoid any implosion in the stock price—to maintain the value of what they have. In some sense, the shift from options to awards might represent a small glimmer of hope that CEO labor markets are getting a bit less dysfunctional (though there is obviously a long way to go).

CEO compensation growth in 2022

Realized CEO compensation (reported in Table 1) declined by 14.8%4 to $25.2 million from 2021 to 2022. This decline was overwhelmingly due to the reduced value of exercised stock options, a decline surely related to broad-based declines in stock prices in 2022.

The granted measure of CEO compensation, which values stock options granted in 2022 (not those exercised), also fell by 12.4%.

Long-term trends in CEO compensation

Table 1 also presents the longer-term trends in CEO compensation for selected years from 1965 to 2022.5 Our discussion of longer-term trends focuses mostly on the realized compensation measure of CEO compensation preferred in most economic analyses. In general, CEO compensation follows the movement of the stock market but tends to exceed even the largest stock market gains.

Table 1 allows us to compare CEO compensation with that of a typical worker by showing the average annual compensation (wages and benefits of a full-time, full-year worker) of private-sector production/nonsupervisory workers (a group covering more than 80% of payroll employment; see Gould 2020).

From 1992 onward, the table also identifies the average annual compensation of production/nonsupervisory workers in the key industries of the firms included in the sample. We take this compensation as a proxy for the pay of typical workers in these particular firms and use it to calculate the CEO-to-worker compensation ratio for each firm.

Table 1

Finally, the table shows inflation-adjusted changes in the stock market, as measured by the Dow Jones Industrial Average and the S&P 500 Index.

CEO compensation (our realized measure) has, in general, risen and fallen along with the S&P 500 Index over the last five and a half decades. But the period from 1965 to 1978 is an exception: Although the stock market fell by roughly half between 1965 and 1978, realized CEO compensation increased by 79.5%.

Typical worker compensation saw relatively strong growth over that period—strong relative to subsequent periods, not relative to CEO pay or the pay of other earners at the top of the wage distribution. Annual worker compensation grew by 20.5% from 1965 to 1978, about a fourth as fast as CEO compensation growth.

Realized CEO compensation grew strongly throughout the 1980s but exploded in the 1990s. It peaked at the end of the stock market bubble in 2000 at about $25.2 million—a 362% increase over just five years earlier in 1995 and a 1,211% increase over 1978. This latter increase exceeded even the growth of the booming stock market between 1978 and 2000 (513.99% for the S&P 500 and 439.98% for the Dow Jones). In stark contrast to both the stock market and CEO compensation, private-sector worker compensation increased just 0.76% from 1978 to 2000.

When the stock market bubble burst in the early 2000s, there was a substantial paring back of CEO compensation. By 2007, however, when the stock market had mostly recovered, realized CEO compensation reached $22.2 million, just $3 million below its 2000 level. However, granted CEO compensation remained down, at $16.8 million in 2007, a substantial $8.3 million fall from the 2000 level.

The stock market decline during the 2008 financial crisis also sent CEO compensation tumbling, as it had in the early 2000s, as realized CEO compensation dropped 46.3% from 2007 to 2009. After 2009, realized CEO compensation resumed an upward trajectory, growing 111.4% from 2009 to 2022 so that CEO compensation exceeded its previous level from 2007 by 13.6%.

To assess the role of CEO compensation in the overall increase in income and wage inequality of the last four decades, it is best to gauge growth since 1978.6 For the period from 1978 to 2022, realized CEO compensation increased 1,209.2%—almost 30% faster than stock market growth (depending on the market index used) and substantially faster than the 15.3% growth in the typical worker’s compensation over the same period. CEO granted compensation grew 1,046.9% over this period.

Trends in the CEO-to-worker compensation ratio

Table 1 also presents trends in the ratio of CEO-to-worker compensation, using both measures of CEO compensation. We compute this ratio, which illustrates the increased divergence between CEO and worker pay over time, in two steps:

• The first step is to construct, for each of the 350 largest U.S. firms, the ratio of the CEO’s compensation to the annual average compensation of production and nonsupervisory workers in the key industry of the firm (data on the pay of workers at individual firms are not available).7
• The second step is to average that ratio across all 350 firms. Note that trends before 1995 are based on the ratio of average top-company CEO pay to the compensation of economywide (not industry-specific) private-sector production/nonsupervisory workers.

The last two columns in Table 1 show the resulting ratio for both measures of CEO pay. The trends are depicted in Figure A.

Figure A

As Table 1 and Figure A show, using the realized measure of CEO compensation, CEOs of major U.S. companies earned 21 times as much as the typical worker in 1965. This ratio grew to 31-to-1 in 1978 and 60-to-1 by 1989. It surged in the 1990s, hitting 381-to-1 in 2000, at the end of the 1990s recovery and at the height of the stock market bubble.8

The fall in the stock market after 2000 reduced CEO stock-related pay, such as realized stock options, and caused CEO compensation to tumble in 2002 before beginning to rise again in 2003. Realized CEO compensation recovered to a level of 326 times worker pay by 2007, still below its 2000 level. The financial crisis of 2008 and accompanying stock market decline reduced CEO compensation between 2007 and 2009, and the CEO-to-worker compensation ratio fell in tandem.

Over the 2009–2022 period, another surge in realized CEO compensation brought the ratio to 344-to-1, above its 2007 level. Besides being higher than the value achieved in 2000 at the peak of a stock market bubble, it is, of course, far higher than it was in the 1960s, 1970s, 1980s, and the early 1990s.

The pattern using the granted measure of CEO compensation is similar. The CEO-to-worker pay ratio peaked in 2000, at 396-to-1, even higher than the ratio of 381-to-1 with the realized compensation measure. The fall from 2000 to 2007 was steeper than for the other measure, and the CEO-to-worker pay ratio hit 242-to-1 in 2007. The stock market decline during the financial crisis drove the ratio down to 181-to-1 in 2009. The growth in granted CEO compensation over the 2009–2022 period, at just 30.9%, was far less than for realized compensation, so the CEO-to-worker pay ratio recovered to only 229-to-1. This level is far lower than its peak in 2000 but still far greater than the 1995 ratio of 131-to-1, the 1989 ratio of 45-to-1, or the 1965 ratio of 15-to-1.

The extraordinarily high level of the CEO-to-worker compensation ratio reflects the strikingly different trajectory of CEO pay compared with typical worker pay over the past 40 years. On the one hand, there has been very little growth in the compensation of a typical worker since the late 1970s. It has grown just 15.3% over the 44 years from 1978 to 2022, despite a corresponding growth of net economywide productivity of 64.6% (EPI 2022). The 1,437% growth in realized CEO compensation from 1978 (there are no data for 1979) to 2021 far exceeded the growth in productivity, profits, or stock market values in that period.

CEO pay is excessive even relative to other extraordinarily privileged actors in the economy

This section highlights how out-of-line CEO pay is even compared with the most privileged workers in the U.S. economy—the top 0.1%. CEO compensation has grown a great deal since 1965, but so has the pay of other high-wage earners. To some analysts, this suggests that the dramatic rise in CEO compensation has been driven largely by the demand for the skills of CEOs and other highly paid professionals. In this interpretation, CEO compensation is being set by the market for “skills” or “talent,” not by managerial power or the ability of CEOs to extract economic rents (to claim income in excess of their contribution to actually producing).9 This explanation lies in contrast to that offered by Bebchuk and Fried (2004) and Clifford (2017) who claim that the long-term increase in CEO pay is a result of managerial power.

The “market for talent” argument is based on the premise that “it is other professionals, too,” not just CEOs, who are seeing a generous rise in pay. The most prominent example of this argument comes from Kaplan (2012a, 2012b). In the prestigious 2012 Martin Feldstein Lecture at the National Bureau of Economic Research, he claims:

Over the last 20 years, then, public company CEO pay relative to the top 0.1% has remained relatively constant or declined. These patterns are consistent with a competitive market for talent. They are less consistent with managerial power. Other top income groups, not subject to managerial power forces, have seen similar growth in pay. (Kaplan 2012a, 4)

In short, Kaplan is claiming that a stable ratio of CEO pay to top 0.1% pay indicates that market power is not operating uniquely in CEO pay markets. One implication of this is that if the CEO-to-top-0.1% pay ratio is in fact increasing, then the scope for unique exercise of market power in CEO labor markets is large.

We find that this argument that CEO compensation is being set by the generalized market for “skills” does not square with the available data. Bivens and Mishel (2013) address the larger issue of the role of CEO compensation in generating income gains at the very top and conclude that substantial rents are, in fact, embedded in executive pay. According to Bivens and Mishel (2013), CEO pay gains are not the result of a competitive market for talent but rather reflect the power of CEOs to extract concessions from corporate boards.

To reach this finding, we use Kaplan’s series (2012b) on CEO compensation (through 2010 and updated forward using CEO realized compensation) and compare it with the wages of the very highest wage earners in the top 0.1% (reflecting W-2 annual earnings, which include exercised stock options and vested stock awards). We use top wage earners rather than top 0.1% household incomes, as Kaplan did, in order to make the comparisons across earners.10 The wage benchmark seems the most appropriate because it avoids issues of changing household demographics (such as increases in the number of two-earner households over time) and limits the income to labor income. Our wage benchmark excludes capital income, which is included in household income measures.

Figure B compares CEO compensation to top 0.1% earnings ratios back to 1951. In 2021 (the last year available for the top 0.1% data series), this ratio was 7.68, meaning that CEOs made nearly 8 times as much in salary as even the most privileged 0.1% of workers in the economy. This 7.68 ratio in 2021 was about 4.1 points higher than the historical average of 3.61 over the 1951–1979 period. This is a large change, meaning that the relative pay of CEOs increased by an amount equal to the total annual wages of four of these very–high–wage earners.11

Figure B

The extremely rapid growth of CEO compensation compared with the earnings of the top 0.1% of wage earners does not mean that the top 0.1% fared poorly. In fact, the very highest earners—those in the top 0.1% of all earners—saw their annual earnings (including realized stock options and vested stock awards) grow fantastically, though far less than the compensation of the CEOs of large firms. Top 0.1% annual earnings grew a healthy 465% from 1979 to 2021, though that was just a small fraction of the 1,437% growth of realized CEO compensation achieved between 1978 and 2021 (strict comparability on the year 1979 is not available in the data).

If CEO pay growing far faster than the pay of other high earners is evidence of the presence of rents, as Kaplan suggests, one would conclude that today’s top executives are collecting substantial rents, claiming income far in excess of their contribution to producing it. This means that if CEOs were paid less, there would be no loss of productivity or output in the economy.

The large discrepancy between the pay of CEOs and other very-high-wage earners also casts doubt on the claim that CEOs are being paid these extraordinary amounts because of their special skills and the market for those skills. It is unlikely that the skills of CEOs of very large firms are so outsized and disconnected from the skills of other high earners that they propel CEOs past most of their cohort in the top one-tenth of 1%. For everyone else, the distribution of skills, as reflected in the overall wage distribution, tends to be much more continuous, so this discontinuity is evidence that factors beyond skills drive the compensation levels of CEOs.

The stock market and CEO pay

There is normally a tight relationship between overall stock prices and CEO compensation. Some commentators draw on this regularity to claim that CEOs are being paid for their performance since, in the commentators’ view, the goal of CEOs is to raise their companies’ stock prices.

However, the stock–CEO compensation relationship does not necessarily imply that CEOs are enjoying high and rising pay because their individual productivity is increasing (because they head larger firms, have adopted new technology, or for other reasons). CEO compensation often grows strongly when the overall stock market rises, and individual firms’ stock values are swept up in this wake. This is a marketwide phenomenon, not one based in the improved performance of individual firms.

Most CEO pay packages allow pay to rise whenever the firm’s stock value rises. In other words, CEOs can cash out stock options regardless of whether the rise in the firm’s stock value was exceptional relative to comparable firms in the same industry. Similarly, vested stock awards increase in value when the firm’s stock price rises in simple correspondence to a marketwide escalation of stock prices. If corporate taxes are reduced and profits rise accordingly, leading to higher stock prices, is it accurate to say that CEOs have made their firms perform better?

The connection between CEO pay and overall inequality

Some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no real consequences for the vast majority of workers. On the contrary, the escalation of CEO compensation, and of executive compensation more generally, has likely helped fuel the wider growth of top 1% and top 0.1% incomes, contributing to widespread inequality.

Our data apply to the CEOs of the very largest firms. We presume that these CEOs set the pay standards followed by other executives—of the largest publicly owned firms, of smaller publicly owned firms, of privately owned firms, and of major nonprofit firms (hospitals, universities, charities, etc.). If so, then CEO compensation is indeed a nontrivial driver of top incomes.

High CEO pay reflects economic rents—income that CEOs can skim from the economy not by virtue of their contribution to economic output but by virtue of their powerful position. Clifford (2017) alludes to the fictional town in the radio program A Prairie Home Companion in describing the Lake Wobegon world of CEO compensation setting that fuels its growth: Every firm wants to believe its CEO is above average and therefore needs to be correspondingly remunerated. But, in fact, CEO compensation could be reduced across the board, and the economy would not suffer any loss of output.

Another implication of rising pay for CEOs and other executives is that it reflects income that would otherwise have accrued to others instead of being concentrated at the highest level. What these executives earned was not available for broader-based wage growth for other workers (Bivens and Mishel 2013). It is useful, in this context, to note that wages for the bottom 90% would be 25% higher today had wage inequality not increased between 1979 and 2021.12

Most of the rise in inequality took the form of redistributing wages away from the bottom 90%. This group’s share of total wage income fell from 69.8% in 1979 to 58.5% in 2021. Most of the loss experienced by the bottom 90% went to the top 1%, whose wage share doubled from 7.3% to 14.6% in these same years. And even among this gain going to the top 1%, most of it went to the top 0.1%, who saw their share of overall wage income more than triple from 1.6% to 5.9% between 1979 and 2021. In other words, the bottom 90% had 11.3% of total wage income taken from them between 1979 and 2021, and that just under two-thirds of this loss (7.3 of 11.3 percentage points) went to the top 1%, and almost 40% (or 4.3 of 11.3 percentage points) went to just the top 0.1%.

Policy recommendations: Reversing the trend

Several policy options could reverse the trend of excessive executive pay and broaden wage growth. Ideally, tax reforms would be paired with changes in corporate governance:

• Implementing higher marginal income tax rates at the very top would limit rent-seeking behavior and reduce the incentives for executives to push for such high pay.
• Another option is to set corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation. Clifford (2017) recommends setting a cap on executive compensation and taxing companies on any amount over the cap, similar to the way baseball team payrolls are taxed when salaries exceed a cap. One key consideration in making policies like this work concerns “fissuring”—the practice of spinning off the lower–paid workers in a given firm and using contracted third-party service providers to replace these functions (often rehiring the exact same workers but now no longer as permanent employees of the old firm). Such fissuring would boost firm-specific measures of typical workers’ pay and reduce the CEO-to-worker pay ratio without changing any economic reality. The newly contracted workers would not necessarily see any higher pay, and the CEOs would not need to accept lower pay. This type of fissuring is endemic in the U.S. economy and is a policy barrier to many efforts to constrain specific firms’ behavior through incentives like this.

Baker, Bivens, and Schieder (2019) review policies that would restrain CEO compensation and explain how tax policy and corporate governance reform can work in tandem:

Tax policy that penalizes corporations for excess CEO-to-worker pay ratios can boost incentives for shareholders to restrain excess pay, [but] to boost the power of shareholders [to restrain pay], fundamental changes to corporate governance have to be made. One key example of such a fundamental change would be to provide worker representation on corporate boards.

Given the vital importance of changing shareholders’ ability to restrain pay (not just their incentive to do so), another policy that could potentially limit executive pay growth is greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

The CEOs examined in this report head large firms. These firms, almost by definition, enjoy a degree of market power that some studies suggest has grown in recent decades. It seems that CEOs and other executives may have been prime beneficiaries of these firms’ greater market power. Using the tools of antitrust enforcement and regulation would help to restrain these firms’ market power. This would not only promote economic efficiency and competition but might help restrain executive pay as well.

Acknowledgments

The authors thank the Stephen M. Silberstein Foundation for its generous support of this research. Steven Balsam has provided useful advice on data construction and interpretation over the years. He is an accounting professor at Temple University and author of Executive Compensation: An Introduction to Practice and Theory (2007) and Equity Compensation: Motivations and Implications (2013). Steven Clifford, author of The CEO Pay Machine: How It Trashes America and How to Stop It (2017), has also provided technical advice. Clifford served as CEO for King Broadcasting Company from 1987 to 1992 and National Mobile Television from 1992 to 2000 and has been a director of 13 public and private companies.

About the authors

Josh Bivens is the chief economist at the Economic Policy Institute. His areas of research include macroeconomics, inequality, social insurance, public investment, and the economics of globalization. Bivens has provided expert insight to a range of institutions and media, including formally testifying numerous times before committees of the U.S. Congress. He has a Ph.D. in economics from the New School for Social Research.

Jori Kandra is a research assistant at the Economic Policy Institute. In addition to the CEO pay series, she has worked on the State of Working America 2020 wages report and the domestic workers chartbook, among other EPI publications. She has a bachelor’s degree in economics from the University of Texas at Austin.

Notes

1. For the pay of the typical worker, we use average compensation (wages and salaries plus benefits) of a full-time, full-year production or nonsupervisory worker (a group that makes up about 80% of the private-sector workforce).

2. In earlier reports, our sample for each year was sometimes fewer than 350 firms because some of these large firms did not have the same CEO for most of or all of the year or the compensation data were not yet available. In order to not let changes in sample size affect annual trends, we now examine the top 350 firms with the largest revenues each year for which there are data.

3. Authors’ analysis of the Compustat ExecuComp data.

4. Note that while we report executive compensation in millions in the text, and we round numbers to the nearest thousand in Table 1, dollar and percent changes are calculated using unrounded data.

5. We choose which years to present in the table based in part on data availability. Where possible, we choose cyclical peaks (years of low unemployment).

6. A better comparison would be to the low-unemployment year of 1979, but those data are not available.

7. There are a limited number of firms, which existed only for certain years between 1992 and 1996, for which a North American Industry Classification System (NAICS) value is unassigned. This makes it impossible to identify the pay of the workers in the firm’s key industry. These firms are therefore not included in the calculation of the CEO-to-worker compensation ratio.

8. As noted earlier, it may seem counterintuitive that the two ratios for 2000 are different from each other when the average CEO compensation is the same. It is important to understand that (as described later in this report) we do not create the ratio from the averages; rather we construct a ratio for each firm and then average the ratios across firms.

9. The managerial power view asserts that CEOs have excessive, noncompetitive influence over the compensation packages they receive. Rent-seeking behavior is the practice of manipulating systems to obtain more than one’s fair share of wealth—that is, finding ways to increase one’s own gains without actually increasing the productive value one contributes to an organization or to the economy.

10. We thank Steve Kaplan for sharing his CEO compensation series with us (Kaplan 2012b). The series on the income of the top 0.1% of households that Kaplan used is no longer available. Moreover, as we discuss, the appropriate comparison is to other earners, not to households, which could have multiple earners and shifts in the number of earners over time.

11. A one-point rise in the ratio is the equivalent of the average CEO earning an additional amount equal to that of the average earnings of someone in the top 0.1%.

12. This follows from the fact that from 1979 to 2020, annual earnings for the bottom 90% rose by 28.2%, while the average growth across all earners was 48.6% (Mishel and Kandra 2021). That means that the bottom 90% would have seen their earnings grow 20.4 percentage points more over the 1979–2020 period if they had enjoyed average growth (i.e., no increase in inequality, 48.6 less 28.2).

References

Baker, Dean, Josh Bivens, and Jessica Schieder. 2019. Reining in CEO Compensation and Curbing the Rise of Inequality. Economic Policy Institute, June 2019.

Bebchuk, Lucian, and Jesse Fried. 2004. Pay Without Performance: The Unfulfilled Promise of Executive Remuneration. Cambridge, Mass.: Harvard Univ. Press.

Bivens, Josh, and Lawrence Mishel. 2013. “The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes.” Economic Policy Institute Working Paper no. 296, June 2013.

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Kaplan, Steven N. 2012b. “Executive Compensation and Corporate Governance in the US: Perceptions, Facts and Challenges.” National Bureau of Economic Research Working Paper no. 18395, September 2012.

Mishel, Lawrence, Josh Bivens, Elise Gould, and Heidi Shierholz. 2012. The State of Working America, 12th Edition. An Economic Policy Institute book. Ithaca, N.Y.: Cornell Univ. Press.

Mishel, Lawrence, and Jori Kandra. 2020. “Wages for the Top 1% Skyrocketed 160% Since 1979 While the Share of Wages for the Bottom 90% Shrunk.” Working Economics Blog (Economic Policy Institute), December 1, 2020.

Mishel, Lawrence, and Jori Kandra. 2021. “Preliminary Data Show CEO Pay Jumped Nearly 16% in 2020, While Average Worker Compensation Rose 1.8%.” Working Economics Blog (Economic Policy Institute), May 27, 2021.

Sabadish, Natalie, and Lawrence Mishel. 2013. “Methodology for Measuring CEO Compensation and the Ratio of CEO-to-Worker Compensation, 2012 Data Update.” Economic Policy Institute Working Paper no. 298, June 2013.

Securities and Exchange Commission (SEC). 2015. “SEC Adopts Rule for Pay Ratio Disclosure: Rule Implements Dodd-Frank Mandate While Providing Companies with Flexibility to Calculate Pay Ratio.” Press release no. 2015-160, August 5, 2015.

Why it matters: Exorbitant CEO pay is a contributor to rising inequality that we could restrain without doing any damage to the wider economy. CEOs are getting ever-higher pay over time because of their power to set pay and because so much of their pay (more than 80%) is stock-related. They are not getting higher pay because they are becoming more productive or more skilled than other workers, or because of a shortage of excellent CEO candidates. This escalation of CEO compensation and of executive compensation more generally has fueled the growth of top 1% and top 0.1% incomes, leaving fewer of the gains of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or were taxed more).

How we can solve the problem: We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so. Such policies could include reinstating higher marginal income tax rates at the very top; setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation; using antitrust enforcement and regulation to restrain the excessive market power of firms—and by extension of CEOs; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

Introduction

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,1 and their pay—which relies heavily on stock-related compensation—has grown much more rapidly than a typical worker’s pay. Importantly, rising CEO pay does not reflect a rising value of skills but rather 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 problematic since the growing earning power of CEOs has been driving income growth at the very top—a key dynamic in the overall growth of inequality. But it also means that CEO pay can be curtailed without damaging economywide growth.

Key findings

• Growth of CEO compensation (1978–2021). Using the realized compensation measure, compensation of the top CEOs increased 1,460.2% from 1978 to 2021 (adjusting for inflation). Top CEO compensation grew roughly 37% faster than stock market growth during this period and far eclipsed the slow 18.1% growth in a typical worker’s annual compensation. CEO granted compensation rose 1,050.2% from 1978 to 2021.
• Growth of CEO compensation during the pandemic (2019–2021). The dramatic increase in CEO compensation during the pandemic is remarkable. While millions lost jobs in the first year of the pandemic and suffered real wage declines due to inflation in the second year, CEOs’ realized compensation jumped 30.3% between 2019 and 2021. Typical worker compensation among those who remained employed rose 3.9% over the same time span.
• Changes in the CEO-to-worker compensation ratio (1965–2021). Using the realized compensation measure, the CEO-to-worker compensation ratio reached 399-to-1 in 2021, a new high. Before the pandemic, its previous peak was the 372-to-1 ratio in 2000. Both of these numbers stand in stark contrast to the 20-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 rose to 236-to-1 in 2021, significantly lower than its peak of 393-to-1 in 2000 but still many times higher than the 44-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 the use of stock awards. Vested stock awards and exercised stock options averaged $21.9 million in 2021 and accounted for 80.1% of the average realized CEO compensation.
• Changes in the CEO-to-top-0.1% compensation ratio. Over the last three decades, compensation grew far faster for CEOs than it did for other very highly paid workers (the top 0.1%, or those earning more than 99.9% of wage earners). CEO compensation in 2020 (the latest year for which data on top wage earners are available) was 6.88 times as high as wages of the top 0.1% of wage earners, a ratio 3.7 points greater than the 3.18-to-1 average CEO-to-top-0.1% ratio over the 1947–1979 period.
• Implications of the growth of CEO-to-top-0.1% compensation ratio. The fact that CEO compensation has grown far faster than the pay of the top 0.1% of wage earners indicates that CEO compensation growth does not simply reflect a competitive race for skills (the “market for talent”) that also increases the value of highly paid professionals more generally. Rather, the growing pay differential between CEOs and top 0.1% earners suggests the growth of substantial economic rents (income not related to a corresponding growth of productivity) in CEO compensation. CEO compensation, it appears, does not reflect the greater productivity of executives but the specific power of CEOs to extract concessions—a power that stems from dysfunctional systems of corporate governance in the United States. 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% compensation (1978–2020). Even though CEO compensation grew much faster than the earnings of the top 0.1% of wage earners, that doesn’t mean the top 0.1% did not fare well. Quite the contrary. The inflation-adjusted annual earnings of the top 0.1% grew 385% from 1978 to 2020. CEO compensation, however, grew nearly four times as fast!
• CEO pay growth compared with growth in the college wage premium. Over the last three decades, CEO compensation increased more relative to the pay of other very-high-wage earners than did the wages of college graduates relative to the wages of high school graduates. This finding indicates that the escalation of CEO pay does not simply reflect a more general rise in the returns to education.

Measuring CEO compensation

We focus on the average compensation of CEOs at the 350 largest publicly owned U.S. firms (i.e., firms that sell stock on the open market) by revenue. Our source of data is the S&P Compustat ExecuComp database for the years 1992 to 2021 and survey data published by The Wall Street Journal for selected years back to 1965. We maintain the sample size of 350 firms each year when using the Compustat ExecuComp data.2

A note about the Compustat data

It is worth noting some complexity of the Compustat data at the outset. Compustat tracks data (including measures of CEO compensation) for all publicly traded firms in the United States across a range of years (we use it back to 1992 and find it reliable since that year). However, public companies sometimes move out of the data universe of publicly traded firms. They might go private, they might go out of business entirely, or they might be bought by another firm. When a firm stops being public, it does not simply drop out of the sample from that point on; it is also removed from previous years’ samples. Optimally, we would like the Compustat data to give us information on the largest 350 firms that were public in a given year. Instead, it gives us information on the largest 350 firms that were public in a given year and that continue to be public according to the most recent data. This explains why some of our data—even for years relatively far in the past—changes with each new iteration of this report.

Further, even the data we use before 1992 (which we explain more about below) rely on a procedure that “backcasts” Compustat to pre-1992 data that originate from other sources. Therefore, even the pre-1992 data can change with each successive round of Compustat.

In practice, the degree of change to previous years’ data caused by this reshuffling of firms in the Compustat universe is quite small, but it is not zero.

Two ways of measuring CEO compensation

We use two measures of CEO compensation, one based on compensation as “realized” and the other based on compensation as “granted.” Both measures include the same measures of salary, bonuses, and long-term incentive payouts. The difference is how each measure treats stock awards and stock options, major components of CEO compensation that change value from when they are first provided, or granted, to when they are realized.

The realized measure of compensation includes the value of stock options as realized (i.e., exercised), capturing the change from when the options were granted to when the CEO invokes the options, usually after the stock price has risen and the options values have increased. The realized compensation measure also values stock awards at their value when vested (usually three years after being granted), capturing any change in the stock price as well as additional stock awards provided as part of a performance award.

The granted measure of compensation values stock options and restricted stock awards by their “fair value” when granted. (Compustat estimates of the fair value of options and stock awards as granted are determined using the Black-Scholes model.) For details on the construction of these measures and benchmarking to other studies, see Sabadish and Mishel 2013.

Analysis

Trends in CEO compensation growth

This section examines several decades of available data to identify historical trends in CEO compensation.

Composition of CEO compensation

Stock-related components of CEO compensation constitute a large and increasing share of total compensation: Realized stock awards and stock options made up 73.3% of total CEO compensation in 2016 ($13.2 million out of $18 million) and 82.0% of total compensation ($22.8 million out of $27.8 million) in 2021 (not shown in chart). The growth of these stock-related components from 2016 to 2021 explains over 93% of the total growth in CEO-realized compensation over this period.4 Of the stock-related components of compensation, stock awards make up a growing share, while the share of stock options in CEO compensation packages has decreased over time.

There is a simple logic behind companies’ decisions to shift from stock options to stock awards in CEO compensation packages, as Clifford (2017) explains. With stock options, CEOs can only make gains: They realize a gain if their company’s stock price rises beyond the price of the initial options granted, and they lose nothing if the stock price falls. The fact that they have nothing to lose—but potentially a lot to gain—might lead options-holding CEOs to take excessive risks to bump up their company’s stock price to an unsustainable short-term high.

Stock awards, on the other hand, promote better alignment of a CEO’s goals with those of shareholders. A stock award has a value when given or when vested, and it can increase or decrease in value as the firm’s stock price changes. If stock awards have a lengthy vesting period of three to five years, then the CEO has an interest in lifting the firm’s stock price over that period while being mindful to avoid any implosion in the stock price—to maintain the value of what they have.

CEO compensation growth in 2021

Realized CEO compensation (reported in Table 1) rose by $2.8 million, up 11.1%,5 to $27.8 million from 2020 to 2021. This growth was overwhelmingly due to the increased value of vested stock awards.

The granted measure of CEO compensation, which values stock options granted in 2021 (not those exercised), rose by $1.4 million, or 9.8%, to $15.6 million.

Long-term trends in CEO compensation

Table 1 also presents the longer-term trends in CEO compensation for selected years from 1965 to 2021.6 Our discussion of longer-term trends focuses mostly on the realized compensation measure of CEO compensation preferred in most economic analyses.

For comparison, the average annual compensation (wages and benefits of a full-time, full-year worker) of private-sector production/nonsupervisory workers (a group covering more than 80% of payroll employment; see Gould 2020) is shown in Table 1, allowing us to compare CEO compensation with that of a typical worker.

From 1995 onward, the table also identifies the average annual compensation of production/nonsupervisory workers in the key industry of the firms included in the sample. We take this compensation as a proxy for the pay of typical workers in these particular firms and use it to calculate the CEO-to-worker compensation ratio for each firm.

Table 1

Finally, the table shows inflation-adjusted changes in the stock market, as measured by the Dow Jones Industrial Average and the S&P 500 Index.

CEO compensation (our realized measure) has, in general, risen and fallen along with the S&P 500 Index over the last five and a half decades. The period from 1965 to 1978 is an exception: Although the stock market fell by roughly half between 1965 and 1978, realized CEO compensation increased by 78.9%.

Typical worker compensation saw relatively strong growth over that period—that is, strong relative to subsequent periods, not relative to CEO pay or the pay of other earners at the top of the wage distribution: Annual worker compensation grew by 20.0% from 1965 to 1978, about a fourth as fast as CEO compensation growth.

Realized CEO compensation grew strongly throughout the 1980s but exploded in the 1990s. It peaked at the end of the stock market bubble, in 2000, at about $23.2 million, a 261% increase over just five years earlier in 1995 and a 1,204% increase over 1978. This latter increase exceeded even the growth of the booming stock market (513% for the S&P 500 and 439% for the Dow) between 1978 and 2000. In stark contrast to both the stock market and CEO compensation, private-sector worker compensation increased just 0.6% from 1978 to 2000.

When the stock market bubble burst in the early 2000s, there was a substantial paring back of CEO compensation. By 2007, however, when the stock market had mostly recovered, realized CEO compensation reached $20.7 million, just $2.5 million below its 2000 level. However, granted CEO compensation remained down, at $15.5 million in 2007, a substantial $7.8 million fall from the 2000 level.

The stock market decline during the 2008 financial crisis also sent CEO compensation tumbling, as it had in the early 2000s, as realized CEO compensation dropped 46.9% from 2007 to 2009. After 2009, realized CEO compensation resumed an upward trajectory, growing 152.7% from 2009 to 2021 so that CEO compensation exceeded its previous level from 2007 by 34.2%. In fact, the fast growth of CEO compensation (as well as a step-up in the pace of inflation) in 2021 brought realized CEO compensation more than $4.5 million above its prior peak level in 2000 at the height of the stock market bubble.

To assess the role of CEO compensation in the overall increase in income and wage inequality of the last four decades it is best to gauge growth since 1978.7 For the period from 1978 to 2021, realized CEO compensation increased 1,460.2%—more than 37% faster than stock market growth (depending on the market index used) and substantially faster than the slow 18.1% growth in the typical worker’s compensation over the same period. CEO granted compensation grew 1,050.2% over this period.

Trends in the CEO-to-worker compensation ratio

Table 1 also presents trends in the ratio of CEO-to-worker compensation, using both measures of CEO compensation. We compute this ratio, which illustrates the increased divergence between CEO and worker pay over time, in two steps:

• The first step is to construct, for each of the 350 largest U.S. firms, the ratio of the CEO’s compensation to the annual average compensation of production and nonsupervisory workers in the key industry of the firm (data on the pay of workers at individual firms are not available).8
• The second step is to average that ratio across all 350 firms. Note that trends before 1995 are based on the changes in average top-company CEO and economywide (not industry-specific) private-sector production/nonsupervisory worker compensation.

The last two columns in Table 1 show the resulting ratio for both measures of CEO pay. The trends are depicted in Figure A.

Figure A

As Table 1 and Figure A show, using the realized measure of CEO compensation, CEOs of major U.S. companies earned 20 times as much as the typical worker in 1965. This ratio grew to 30-to-1 in 1978 and 59-to-1 by 1989. It surged in the 1990s, hitting 372-to-1 in 2000, at the end of the 1990s recovery and at the height of the stock market bubble.9

The fall in the stock market after 2000 reduced CEO stock-related pay, such as realized stock options, and caused CEO compensation to tumble in 2002 before beginning to rise again in 2003. Realized CEO compensation recovered to a level of 335 times worker pay by 2007, still below its 2000 level. The financial crisis of 2008 and accompanying stock market decline reduced CEO compensation between 2007 and 2009, as discussed above, and the CEO-to-worker compensation ratio fell in tandem.

Over the 2009–2021 period, CEO pay resumed its upward trajectory and the 152.7% surge in realized CEO compensation brought the ratio to 399-to-1, above its 2007 level. Besides being higher than the value achieved in 2000 at the peak of a stock market bubble, it is, of course, far higher than it was in the 1960s, 1970s, 1980s, and the early 1990s.

The pattern using the granted measure of CEO compensation is similar. The CEO-to-worker pay ratio peaked in 2000, at 393-to-1, even higher than the ratio with the realized compensation measure. The fall from 2000 to 2007 was steeper than for the other measure, and it hit 246-to-1 in 2007. The stock market decline during the financial crisis drove the ratio down to 177-to-1 in 2009. The growth in granted CEO compensation over the 2009–2021 period, at just 37.2%, was far less than for realized compensation, so the CEO-to-worker pay ratio recovered to only 236-to-1. This level is far lower than its peak in 2000 but still far greater than the 1995 ratio of 132-to-1, the 1989 ratio of 44-to-1, or the 1965 ratio of 15-to-1.

The exponential growth in the CEO-to-worker compensation ratio reflects the strikingly different trajectory of CEO pay compared with typical worker pay. On the one hand, there has been very little growth in the compensation of a typical worker since the late 1970s: It has grown just 18.1% over the 43 years from 1978 to 2021, despite a corresponding growth of net economywide productivity of 61.8% (EPI 2021). The 1,460.2% growth in realized CEO compensation from 1978 (there are no data for 1979) to 2020 far exceeded the growth in productivity, profits, or stock market values in that period.

Dramatically high CEO pay does not simply reflect the market for skills

This section reviews competing explanations for the extraordinary rise in CEO compensation over the past several decades. CEO compensation has grown a great deal since 1965, but so has the pay of other high-wage earners. To some analysts, this suggests that the dramatic rise in CEO compensation has been driven largely by the demand for the skills of CEOs and other highly paid professionals. In this interpretation, CEO compensation is being set by the market for “skills” or “talent,” not by managerial power or rent-seeking behavior.10 This explanation lies in contrast to that offered by Bebchuk and Fried (2004) and Clifford (2017), who claim that the long-term increase in CEO pay is a result of managerial power.

The “market for talent” argument is based on the premise that “it is other professionals, too,” not just CEOs, who are seeing a generous rise in pay. The most prominent example of this argument comes from Kaplan (2012a, 2012b). In the prestigious 2012 Martin Feldstein Lecture at the National Bureau of Economic Research, he claims:

Over the last 20 years, then, public company CEO pay relative to the top 0.1% has remained relatively constant or declined. These patterns are consistent with a competitive market for talent. They are less consistent with managerial power. Other top income groups, not subject to managerial power forces, have seen similar growth in pay. (Kaplan 2012a, 4)

In a follow-up paper for the Cato Institute, published as a National Bureau of Economic Research working paper, Kaplan expands this point:

The point of these comparisons is to confirm that while public company CEOs earn a great deal, they are not unique. Other groups with similar backgrounds—private company executives, corporate lawyers, hedge fund investors, private equity investors and others—have seen significant pay increases where there is a competitive market for talent and managerial power problems are absent. Again, if one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why these professional groups have had a similar or even higher growth in pay. It seems more likely that a meaningful portion of the increase in CEO pay has been driven by market forces as well. (Kaplan 2012b, 21)

However, the argument that CEO compensation is being set by the market for “skills” does not square with the available data corresponding to Kaplan’s argument. Bivens and Mishel (2013) address the larger issue of the role of CEO compensation in generating income gains at the very top and conclude that substantial rents are embedded in executive pay. According to Bivens and Mishel, CEO pay gains are not the result of a competitive market for talent but rather reflect the power of CEOs to extract concessions.

Here we draw on and update Bivens and Mishel’s 2013 analysis to show that the evidence does not support Kaplan’s claim that “professional groups have had a similar or even higher growth in pay” than CEOs (Kaplan 2012b). Not even close. CEO compensation grew far faster than that of very highly paid workers over the last few decades, which suggests that the market for skills was not responsible for the rapid growth of CEO compensation.

Trends in the CEO-to-top-1% compensation ratio

To reach this finding, we use Kaplan’s series (Kaplan 2012b) on CEO compensation (through 2010 and updated forward using CEO realized compensation) and compare it with the wages of the very highest wage earners in the top 0.1% (reflecting W-2 annual earnings, which includes exercised stock options and vested stock awards). We use top wage earners rather than top 0.1% household incomes, as Kaplan did, in order to make the comparisons across earners.11 The wage benchmark seems the most appropriate one because it avoids issues of changing household demographics (e.g., increases in the number of two-earner households over time) and limits the income to labor income (i.e., it excludes capital income, which is included in household income measures).

The data presented in Table 2 show the result of our analysis: We find that, contrary to Kaplan’s findings, the compensation of CEOs has far outpaced that of the top 0.1% of earners. We present the ratio of the average compensation of CEOs of large firms (the series developed by Kaplan, incorporating stock options realized) to the average annual earnings of the top 0.1% of wage earners (based on a series developed by Kopczuk, Saez, and Song [2010] and updated by Mishel and Kandra [2021]) as a simple ratio and as a logged ratio (to convert it to a “premium,” defined as the relative pay differential between two groups) for selected years from 1979 to 2020.

Table 2

Both the simple ratios and the log ratios understate the relative pay of CEOs because CEO pay is a nontrivial share of the denominator, a bias that has probably grown over time as CEO relative pay has grown. If we were able to remove top CEOs’ pay from the top 0.1% category, it would reduce the average for the broader group.12

But even with this inherent bias, these ratios tell a striking story of excessive growth in CEO pay in recent decades: CEO compensation was 6.88 times the pay of the top 0.1% of wage earners in 2020, substantially higher than the 4.36 ratio in 2007. CEO compensation grew far faster than that of the top 0.1% of earners over the recovery from 2009 to 2020, as the ratio spiked from 4.61 to 6.88. CEO compensation relative to the wages of the top 0.1% of wage earners in 2020 far exceeded the ratio of 2.63 in 1989, a rise (+4.25) equal to more than the pay of four very-high-wage earners.13

The log ratio of CEO relative pay grew 96 log points from 1989 to 2020 with respect to wage earners in the top 0.1%. CEO compensation grew more slowly than top 0.1% earnings over the 1979–1989 period, so longer-term comparisons back to 1979 show a lesser, but still substantial, rise in CEO compensation relative to other top earners.

Figure B compares the CEO compensation to top 0.1% earnings ratios back to 1947. In 2020 this ratio was 6.88, 3.7 points higher than the historical average of 3.18 over the 1947–1979 period (a relative gain in wages earned by the equivalent of three very-high-wage earners).

Figure B

That CEO compensation grew much faster than the earnings of the top 0.1% of wage earners is not because the top 0.1% did not fare well. The very highest earners—those in the top 0.1% of all earners—saw their annual earnings (including realized stock options and vested stock awards) grow fantastically, though far less than the compensation of the CEOs of large firms: Top 0.1% annual earnings grew a healthy 385% from 1978 to 2020, though that was just a small fraction of the 1,304% growth of realized CEO compensation between those years (see data in Table 1).

If CEO pay growing far faster than the pay of other high earners is evidence of the presence of rents, as Kaplan suggests, one would conclude that today’s top executives are collecting substantial rents, meaning that if they were paid less there would be no loss of productivity or output in the economy.

The large discrepancy between the pay of CEOs and other very-high-wage earners also casts doubt on the claim that CEOs are being paid these extraordinary amounts because of their special skills and the market for those skills. It is unlikely that the skills of CEOs of very large firms are so outsized and disconnected from the skills of other high earners that they propel CEOs past most of their cohort in the top one-tenth of 1%. For everyone else, the distribution of skills, as reflected in the overall wage distribution, tends to be much more continuous, so this discontinuity is evidence that factors beyond skills drive the compensation levels of CEOs.

Trends in the growth of returns to education

For comparison purposes, Table 2 also shows the changes in the gross (not regression-adjusted) college-to-high-school wage premium. This premium is simply how much higher the hourly wages of workers with a (four-year) college degree are relative to the hourly wages of workers with only a high school diploma. This premium is a useful data point to examine because some commentators, such as Mankiw (2013), assert that the wage and income growth of the top 1% reflects the general rise in the return to skills, as reflected in higher college wage premiums.

Since 1979, and particularly since 1989, the increase in the logged CEO pay premium relative to other high-wage earners far exceeds the rise in the logged college-to-high-school wage premium, which is widely and appropriately considered to have had substantial growth: The logged college wage premium grew from 0.46 in 1989 to 0.61 in 2020, far smaller than the 0.97 to 1.93 rise in the logged ratio of CEO-to-top-0.1% earnings.

Mankiw’s claim that top 1% pay or top executive pay simply corresponds to the rise in the college-to-high-school wage premium is unfounded (Mishel 2013a, 2013b). Moreover, the data we present here would show even faster growth of CEO relative pay if Kaplan’s historical CEO compensation series (which we use as the basis for the ratios in Table 2) had been built using the Frydman and Saks (2010) series for the 1980–1994 period rather than the Hall and Liebman (1997) data.14

The stock market and CEO pay

There is normally a tight relationship between overall stock prices and CEO compensation. Some commentators draw on this regularity to claim that CEOs are being paid for their performance since, in their view, the goal of a CEO is to raise their company’s stock price.

However, the stock–CEO compensation relationship does not necessarily imply that CEOs are enjoying high and rising pay because their individual productivity is increasing (e.g., because they head larger firms, have adopted new technology, or for other reasons). CEO compensation often grows strongly when the overall stock market rises and individual firms’ stock values rise along with it. This is a marketwide phenomenon, not one based in the improved performance of individual firms.

Most CEO pay packages allow pay to rise whenever the firm’s stock value rises; that is, they permit CEOs to cash out stock options regardless of whether the rise in the firm’s stock value was exceptional relative to comparable firms in the same industry. Similarly, vested stock awards increase in value when the firm’s stock price rises in simple correspondence to a marketwide escalation of stock prices. If corporate taxes are reduced and profits rise, leading to higher stock prices, is it accurate to say that CEOs have made their firms perform better?

The connection between CEO pay and overall inequality

Some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no consequences for the vast majority of workers. However, the escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1% and top 0.1% incomes, generating widespread inequality.

In their studies of tax returns from 1979 to 2005, Bakija, Cole, and Heim (2010, 2012) establish that the increases in income among the top 1% and top 0.1% of households were disproportionately driven by households headed by someone who was either a nonfinancial-sector “executive” (including managers and supervisors, hereafter referred to as “nonfinance executives”) or a financial-sector worker (executive or otherwise). Forty-four percent of the growth of the top 0.1%’s income share and 36% of the top 1%’s income share accrued to households headed by nonfinance executives; another 23% for each group accrued to households headed by financial-sector workers (some portion of which were executives).

Together, finance workers (including some who are executives) and nonfinance executives accounted for 58% of the expansion of income for the top 1% of households and 67% of the income growth of the top 0.1%. The income growth of executives is the largest factor that led top 0.1% and top 1% incomes to greatly increase over the last four decades.

Our data applies to the CEOs of the very largest firms. We presume that these CEOs set the pay standards followed by other executives—of the largest publicly owned firms, of smaller publicly owned firms, of privately owned firms, and of major nonprofit firms (hospitals, universities, charities, etc.). If so, then CEO compensation is the largest driver of top incomes.

Relative to others in the top 1%, households headed by nonfinance executives had roughly average income growth; those headed by someone in the financial sector had above-average income growth; and the remaining top 1% households (nonexecutive, nonfinance) had slower-than-average income growth. These shares may actually understate the role of nonfinance executives and the financial sector because they do not account for increased spousal income from these sources in cases in which the head of household is not an executive or in finance.15

High CEO pay reflects economic rents—concessions CEOs can draw from the economy not by virtue of their contribution to economic output but by virtue of their position of power. Alluding to the fictional town in the radio program A Prairie Home Companion, Clifford (2017) describes the Lake Wobegon world of setting CEO compensation that fuels its growth: Every firm wants to believe its CEO is above average and therefore needs to be correspondingly remunerated. But, in fact, CEO compensation could be reduced across the board and the economy would not suffer any loss of output.

Another implication of rising pay for CEOs and other executives is that it reflects income that would otherwise have accrued to others: What these executives earned was not available for broader-based wage growth for other workers. (Bivens and Mishel [2013] explore this issue in depth.) It is useful, in this context, to note that wage growth for the bottom 90% would have been more than 72% faster over the 1979–2020 period had wage inequality not grown.16 Most of the rise of inequality took the form of redistributing wages from the bottom 90%—whose share of wages fell from 69.8% to 60.2%—to the top 1%—whose wage share nearly doubled, rising from 7.3% to 13.8%, with most of the increase accruing to the top 0.1%, whose share of all wages grew from 1.6% to 5.4% (Mishel and Kandra 2021).

Policy recommendations: Reversing the trend

Several policy options could reverse the trend of excessive executive pay and broaden wage growth. Some involve taxes:

• Implementing higher marginal income tax rates at the very top would limit rent-seeking behavior and reduce the incentives for executives to push for such high pay.
• Another option is to set corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation. Clifford (2017) recommends setting a cap on compensation and taxing companies on any amount over the cap, similar to the way baseball team payrolls are taxed when salaries exceed a cap.

Other policies that could potentially limit executive pay growth are changes in corporate governance, such as greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

Baker, Bivens, and Schieder (2019) review policies to restrain CEO compensation and explain how tax policy and corporate governance reform can work in tandem: “Tax policy that penalizes corporations for excess CEO-to-worker pay ratios can boost incentives for shareholders to restrain excess pay,” but, “to boost the power of shareholders [to restrain pay], fundamental changes to corporate governance have to be made. One key example of such a fundamental change would be to provide worker representation on corporate boards.”

The CEOs examined in this report head large firms. These large firms, almost by definition, enjoy a degree of market power that some studies suggest has grown in recent decades. It seems that CEOs and other executives may have been prime beneficiaries of these firms’ greater market power. This suggests that it could be beneficial to use the tools of antitrust enforcement and regulation to restrain these firms’ market power. This would not only promote economic efficiency and competition but might help restrain executive pay as well.

Acknowledgments

The authors thank the Stephen M. Silberstein Foundation for its generous support of this research. Steven Balsam, an accounting professor at Temple University and author of Executive Compensation: An Introduction to Practice and Theory (2007) and Equity Compensation: Motivations and Implications (2013), has provided useful advice on data construction and interpretation over the years. Steven Clifford, author of The CEO Pay Machine: How It Trashes America and How to Stop It (2017), has also provided technical advice. Clifford served as CEO for King Broadcasting Company from 1987 to 1992 and National Mobile Television from 1992 to 2000 and has been a director of 13 public and private companies.

About the authors

Josh Bivens is the director of research at the Economic Policy Institute. His areas of research include macroeconomics, inequality, social insurance, public investment, and the economics of globalization. Bivens has provided expert insight to a range of institutions and media, including formally testifying numerous times before committees of the U.S. Congress. He has a Ph.D. in economics from the New School for Social Research.

Jori Kandra is a research assistant at the Economic Policy Institute. In addition to her work on the CEO pay series, she has worked on the State of Working America 2020 wages report and the domestic workers chartbook, among other EPI publications. She has a bachelor’s degree in economics from the University of Texas at Austin.

Notes

1. For the pay of the typical worker, we use average compensation (wages and salaries plus benefits) of a full-time, full-year production or nonsupervisory worker (a group that makes up about 80% of the private-sector workforce).

2. In earlier reports, our sample for each year was sometimes fewer than 350 firms because some of these large firms did not have the same CEO for most of or all of the year or the compensation data were not yet available. In order to not let changes in sample size affect annual trends, we now examine the top 350 firms with the largest revenues each year for which there are data.

3. We do the same with Mark Zuckerberg’s pay in 2013 because the initial public offering (IPO) for Facebook gave him a “realized” compensation of over $3 billion that year (Davis and Mishel 2014).

4. Authors’ analysis of the Compustat ExecuComp data.

5. Note that while we report executive compensation in millions in the text, and we round numbers to the nearest thousand in Table 1, dollar and percent changes are calculated using unrounded data.

6. We choose which years to present in the table based in part on data availability. Where possible, we choose cyclical peaks (years of low unemployment).

7. A better comparison would be to the low-unemployment year of 1979, but those data are not available.

8. There are a limited number of firms, which existed only for certain years between 1992 and 1996, for which a North American Industry Classification System (NAICS) value is unassigned. This makes it impossible to identify the pay of the workers in the firm’s key industry. These firms are therefore not included in the calculation of the CEO-to-worker compensation ratio.

9. As noted earlier, it may seem counterintuitive that the two ratios for 2000 are different from each other when the average CEO compensation is the same. It is important to understand that (as we describe later in this report) we do not create the ratio from the averages; rather we construct a ratio for each firm and then average the ratios across firms.

10. The managerial power view asserts that CEOs have excessive, noncompetitive influence over the compensation packages they receive. Rent-seeking behavior is the practice of manipulating systems to obtain more than one’s fair share of wealth—that is, finding ways to increase one’s own gains without actually increasing the productive value one contributes to an organization or to the economy.

11. We thank Steve Kaplan for sharing his CEO compensation series with us (Kaplan 2012b). The series on the income of the top 0.1% of households that Kaplan used is no longer available. Moreover, as we discuss, the appropriate comparison is to other earners, not to households, which could have multiple earners and shifts in the number of earners over time.

12. Temple University professor Steve Balsam provided tabulations from the Capital IQ database of annual wages of executives exceeding the wage thresholds (provided to him based on the Social Security Administration data used in Mishel and Kandra 2020) that place them in the top 0.1% of wage earners. There were 38,824 executives in publicly held firms in 2007; of those, 9,692 executives were in the top 0.1% of wage earners. These 9,692 executives had average annual earnings of $4.4 million. Using Mishel et al.’s (2012) estimates of top 0.1% wages, we find that executive wages make up 13.3% of total top 0.1% wages. One can gauge the bias of including executive wages in the denominator by noting that the ratio of executive wages to all top 0.1% wages in 2007 was 2.14 but the ratio of executive wages to nonexecutive wages was 2.32. We do not have data that would permit an assessment of the bias in 1979 or 1989. We also lack information on the number and wages of executives in privately held firms: To the extent that their CEO compensation exceeds that of publicly held firms, their inclusion would indicate an even larger bias. The Internal Revenue Service Statistics of Income (SOI) Bulletin reports that there were nearly 15,000 corporate tax returns in 2007 of firms with assets exceeding $250 million (IRS 2019). Given that the total number of publicly held firms in the United States was roughly 5,000 in 2007 (Bloomberg 2018), the majority of these 15,000 tax returns had to have come from privately held companies, meaning there is a much larger number of executives of large firms than we are able to capture through data on publicly held firms.

13. A one-point rise in the ratio is the equivalent of the average CEO earning an additional amount equal to that of the average earnings of someone in the top 0.1%.

14. Kaplan (2012b, 14) notes that the Frydman and Saks series grew 289% whereas the Hall and Liebman series grew 209%. He also notes that the Frydman and Saks series grew faster than the series reported by Murphy (2012).

15. The tax data analyzed categorizes a household’s income according to the occupation and industry of the head of household. It is possible that a “secondary earner,” or spouse, has income earned as an executive or as a financial-sector worker. If the household is in the top 1% or top 0.1% but the head of household is not an executive or in finance, then the spouse’s contribution to income growth will not be identified as being connected to executive pay or financial-sector pay. The discussion in this paragraph draws on Bivens and Mishel 2013.

16. This follows from the fact that from 1979 to 2020, annual earnings for the bottom 90% rose by 28.2%, while the average growth across all earners was 48.6% (Mishel and Kandra 2021). That means that the bottom 90% would have seen their earnings grow 20.4 percentage points more over the 1979–2020 period if they had enjoyed average growth (i.e., no increase in inequality, 48.6 less 28.2).

References

Baker, Dean, Josh Bivens, and Jessica Schieder. 2019. Reining in CEO Compensation and Curbing the Rise of Inequality. Economic Policy Institute, June 2019.

Bakija, Jon, Adam Cole, and Bradley Heim. 2010. “Job and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data.” Department of Economics Working Paper no. 2010-24, Williams College, November 2010.

Bakija, Jon, Adam Cole, and Bradley Heim. 2012. “Job and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data.” Department of Economics Working Paper, Williams College, April 2012.

Balsam, Steven. 2007. Executive Compensation: An Introduction to Practice and Theory. Washington, D.C.: WorldatWork Press.

Balsam, Steven. 2013. Equity Compensation: Motivations and Implications. Washington, D.C.: WorldatWork Press.

Bebchuk, Lucian, and Jesse Fried. 2004. Pay Without Performance: The Unfulfilled Promise of Executive Remuneration. Cambridge, Mass.: Harvard Univ. Press.

Bivens, Josh, and Lawrence Mishel. 2013. “The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes.” Economic Policy Institute Working Paper no. 296, June 2013.

Bloomberg. 2018. “Where Have All the Public Companies Gone?” April 9, 2018.

Bureau of Economic Analysis (BEA). Various years. National Income and Product Accounts (NIPA) Tables [online data tables]. Tables 6.2C, 6.2D, 6.3C, and 6.3D.

Bureau of Labor Statistics (BLS). Various years. Employment, Hours, and Earnings—National [database]. In Current Employment Statistics [public data series].

Clifford, Steven. 2017. The CEO Pay Machine: How It Trashes America and How to Stop It. New York: Penguin Random House.

Compustat. Various years. ExecuComp [commercial database].

Davis, Alyssa, and Lawrence Mishel. 2014. CEO Pay Continues to Rise as Typical Workers Are Paid Less. Economic Policy Institute, June 2014.

DeLong, Brad. 2022. “Tesla’s Valuation(s).” Braddelong.substack.com, May 24, 2022.

Economic Policy Institute (EPI). 2021. “The Productivity–Pay Gap.” Economic Policy Institute website, accessed August 29, 2022.

Federal Reserve Bank of St. Louis. Various years. Federal Reserve Economic Data (FRED) [database].

Frydman, Carola, and Raven E. Saks. 2010. “Executive Compensation: A New View from a Long-Term Perspective, 1936–2005.” Review of Financial Studies 23, no. 5: 2099–2138.

Gould, Elise, 2020. “The Labor Market Continues to Improve in 2019 as Women Surpass Men in Payroll Employment, but Wage Growth Slows.” Working Economics Blog (Economic Policy Institute), January 10, 2020.

Hall, Brian J., and Jeffrey B. Liebman. 1997. “Are CEOs Really Paid Like Bureaucrats?” National Bureau of Economic Research Working Paper no. 6213, October 1997.

Internal Revenue Service (IRS). 2019. “SOI Bulletin Historical Table 12: Number of Business Income Tax Returns, by Size of Business for Income Years, Tax Years 1990–2016, Expanded Version” (data table). Excel file downloadable at https://www.irs.gov/statistics/soi-tax-stats-historical-table-12.

Kaplan, Steven N. 2012a. “Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges.” Martin Feldstein Lecture, National Bureau of Economic Research, Washington, D.C., July 10, 2012.

Kaplan, Steven N. 2012b. “Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges.” National Bureau of Economic Research Working Paper no. 18395, September 2012.

Kopczuk, Wojciech, Emmanuel Saez, and Jae Song. 2010. “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data Since 1937.” Quarterly Journal of Economics 125, no. 1: 91–128.

Mankiw, N. Gregory. 2013. “Defending the One Percent.” Journal of Economic Perspectives 27, no. 3: 21–24.

Mishel, Lawrence. 2013a. “Greg Mankiw Forgets to Offer Data for His Biggest Claim.” Working Economics Blog (Economic Policy Institute), June 25, 2013.

Mishel, Lawrence. 2013b. “Working as Designed: High Profits and Stagnant Wages.” Working Economics Blog (Economic Policy Institute), March 28, 2013.

Mishel, Lawrence, and Josh Bivens. 2021. “The Role of Policy Choices in Explaining Wage Suppression and Wage Inequality.” International Productivity Monitor, Fall 2021 (forthcoming).

Mishel, Lawrence, Josh Bivens, Elise Gould, and Heidi Shierholz. 2012. The State of Working America, 12th Edition. An Economic Policy Institute book. Ithaca, N.Y.: Cornell Univ. Press.

Mishel, Lawrence, and Jori Kandra. 2020. “Wages for the Top 1% Skyrocketed 160% Since 1979 While the Share of Wages for the Bottom 90% Shrunk.” Working Economics Blog (Economic Policy Institute), December 1, 2020.

Mishel, Lawrence, and Jori Kandra. 2021. “Preliminary Data Show CEO Pay Jumped Nearly 16% in 2020, While Average Worker Compensation Rose 1.8%.” Working Economics Blog (Economic Policy Institute), May 27, 2021.

Murphy, Kevin. 2012. “The Politics of Pay: A Legislative History of Executive Compensation.” University of Southern California Marshall School of Business Working Paper no. FBE 01.11.

Sabadish, Natalie, and Lawrence Mishel. 2013. “Methodology for Measuring CEO Compensation and the Ratio of CEO-to-Worker Compensation, 2012 Data Update.” Economic Policy Institute Working Paper no. 298, June 2013.

Securities and Exchange Commission (SEC). 2015. “SEC Adopts Rule for Pay Ratio Disclosure: Rule Implements Dodd-Frank Mandate While Providing Companies with Flexibility to Calculate Pay Ratio.” Press release no. 2015-160, August 5, 2015.

As the nation pivoted to recovery, readers sought information on ways to remedy the economic injustices laid bare by the pandemic. Given the heavy burden borne by low-wage front-line workers, it is no surprise that raising wages, boosting worker power, and scrutinizing excessive compensation of people at the top were highest on the reading list. Here’s a countdown of EPI’s most-read reports in 2021.

Why it matters: Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. CEOs are getting more because of their power to set pay and because so much of their pay (more than 80%) is stock-related, not because they are increasing their productivity or possess specific, high-demand skills. This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or were taxed more).

How we can solve the problem: We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so. Such policies could include reinstating higher marginal income tax rates at the very top; setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation; use of antitrust enforcement and regulation to restrain firms’—and by extension, CEOs’—excessive market power; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

Introduction

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. Importantly, rising CEO pay does not reflect rising value of skills, but rather 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 their actual productivity). This is problematic since this growing earning power of CEOs has been driving income growth at the very top, a key dynamic in the overall growth of inequality.

Key findings

• Growth of CEO compensation (1978–2020). Using the realized compensation measure, compensation of the top CEOs increased 1,322.2% from 1978 to 2020 (adjusting for inflation). Top CEO compensation grew roughly 60% faster than stock market growth during this period and far eclipsed the slow 18.0% growth in a typical worker’s annual compensation. CEO granted compensation rose 970.2% from 1978 to 2020.
• Growth of CEO compensation during the pandemic (2019–2020). The dramatic increase in CEO compensation during the pandemic is remarkable. While millions were out of work, CEOs’ realized compensation jumped 18.9% in just one year. Typical worker compensation, of those who remained employed, did rise 3.9% over that year—and even that wage growth is overstated: Perversely, high job loss among low-wage workers skewed the average wage higher.
• Changes in the CEO-to-worker compensation ratio (1965–2020). Using the realized compensation measure, the CEO-to-worker compensation ratio was 21-to-1 in 1965. It peaked at 366-to-1 in 2000. In 2020 the ratio was 351-to-1. Most important, the ratio was far higher than at any point in the 1960s, 1970s, 1980s, or 1990s. Using the CEO granted compensation measure, the CEO-to-worker compensation ratio rose to 203-to-1 in 2020, significantly lower than its peak of 386-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 the use of stock awards. Vested stock awards and exercised stock options totaled $20.1 million in 2020 and accounted for 83.1% of average realized CEO compensation.
• Changes in the CEO-to-top-0.1% compensation ratio. Over the last three decades, compensation grew far faster for CEOs than it did for other very highly paid workers (the top 0.1%, or those earning more than 99.9% of wage earners). CEO compensation in 2019 (the latest year for which data on top wage earners are available) was 6.44 times as high as wages of the top 0.1% of wage earners, a ratio 3.26 points greater than the 3.18-to-1 average CEO-to-top-0.1% ratio over the 1947–1979 period.
• Implications of the growth of CEO-to-top-0.1% compensation ratio. The fact that CEO compensation has grown far faster than the pay of the top 0.1% of wage earners indicates that CEO compensation growth does not simply reflect a competitive race for skills (the “market for talent”) that also increased the value of highly paid professionals: Rather, the growing pay differential between CEOs and top 0.1% earners suggests the growth of substantial economic rents (income not related to a corresponding growth of productivity) in CEO compensation. CEO compensation appears to reflect not greater productivity of executives but the power of CEOs to extract concessions. Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on the economy’s output or on employment.
• Growth of top 0.1% compensation (1978–2019). Even though CEO compensation grew much faster than the earnings of the top 0.1% of wage earners, that doesn’t mean the top 0.1% did not fare well. Quite the contrary. The inflation-adjusted annual earnings of the top 0.1% grew 341% from 1978 to 2019. CEO compensation, however, grew three times as fast!
• CEO pay growth compared with growth in the college wage premium. Over the last three decades, CEO compensation increased more relative to the pay of other very-high-wage earners than did the wages of college graduates relative to the wages of high school graduates. This finding indicates that the escalation of CEO pay does not simply reflect a more general rise in the returns to education.

Measuring CEO compensation

We focus on the average compensation of CEOs at the 350 largest publicly owned U.S. firms (i.e., firms that sell stock on the open market) by revenue. Our source of data is the S&P ExecuComp database for the years 1992 to 2020 and survey data published by the Wall Street Journal for selected years back to 1965. We maintain the sample size of 350 firms each year when using the ExecuComp data.1

We use two measures of CEO compensation, one based on compensation as “realized” and the other based on compensation as “granted.” Both measures include the same measures of salary, bonuses, and long-term incentive payouts. The difference is how each measure treats stock awards and stock options, major components of CEO compensation that change value from when they are first provided, or granted, to when they are realized.

The realized measure of compensation includes the value of stock options as realized (i.e., exercised), capturing the change from when the options were granted to when the CEO invokes the options, usually after the stock price has risen and the options values have increased. The realized compensation measure also values stock awards at their value when vested (usually three years after being granted), capturing any change in the stock price as well as additional stock awards provided as part of a performance award.

The granted measure of compensation values stock options and restricted stock awards by their “fair value” when granted (Compustat estimates of the fair value of options and stock awards as granted determined using the Black Scholes model). For details on the construction of these measures and benchmarking to other studies, see Sabadish and Mishel 2013.

Analysis

Trends in CEO compensation growth

This section examines several decades of available data to identify historical trends in CEO compensation.

Composition of CEO compensation

Stock-related components of CEO compensation constitute a large and increasing share of total compensation: Realized stock awards and stock options were 73.1% of total compensation in 2016 ($12.6 million out of $17.2 million) and were 83.1% of total compensation ($20.1 million out of $24.2 million) in our sample for 2020. The growth of these stock-related components from 2016 to 2020 was the sole reason total CEO realized compensation grew by $7.0 million from $17.2 million to $24.2 million, up 40.5%. Of the stock-related components of compensation, stock awards make up a growing share while the share of stock options in CEO compensation packages has decreased over time.

There is a simple logic behind companies’ decisions to shift from stock options to stock awards in CEO compensation packages, as Clifford (2017) explains. With stock options, CEOs can only make gains: They realize a gain if the stock price rises beyond the price of the initial options granted and they lose nothing if the stock price falls. The fact that they have nothing to lose—but potentially a lot to gain—might lead options-holding CEOs to take excessive risks to bump up the stock price.

Stock awards, on the other hand, promote better alignment of a CEO’s goals with shareholders’ goals. A stock award has the value when given, or vested, and can increase or decrease in value as the firm’s stock price changes. If stock awards have a lengthy vesting period, say three to five years, then the CEO has an interest in lifting the firm’s stock price over that period while being mindful to avoid any implosion in the stock price—to maintain the value of what they have.

Growth in 2020

Realized CEO compensation (reported in Table 1) rose by $3.8 million, up 18.9%, to $24.2 million from 2019 to 2020, almost entirely due to the increased value of exercised stock options (we report executive compensation in millions, but dollar and percent changes are calculated using unrounded data). The granted measure of CEO compensation, which values stock options granted in 2020 (not those exercised), actually fell by $30,000, or 0.2%, to 13.9 million. Thus, it seems the large growth of CEO compensation in 2020 was driven by executives cashing out their options at a time of high stock prices.

These results are in sync with the preliminary analyses (Mishel and Kandra 2021) previously reported. Mishel and Kandra (2021) analyzed the firms from the 2019 sample that had reported their executive compensation by the end of April 2021. CEO realized compensation, including realized stock options and vested stock awards, rose 15.9% from 2019 to 2020 among the 281 early reporting firms.

Long-term trends

Table 1 also presents the longer-term trends in CEO compensation for selected years from 1965 to 2020.2 Our discussion of longer-term trends focuses mostly on the realized compensation measure of CEO compensation preferred in most economic analyses.

For comparison, the average annual compensation (wages and benefits of a full-time, full-year worker) of private-sector production/nonsupervisory workers (a group covering more than 80% of payroll employment; see Gould 2020) is shown in Table 1, allowing us to compare CEO compensation with that of a typical worker.

From 1995 onward, the table also identifies the average annual compensation of production/nonsupervisory workers in the key industry of the firms included in the sample. We take this compensation as a proxy for the pay of typical workers in these particular firms and use it to calculate the CEO-to-worker compensation ratio for each firm.

Table 1

Finally, the table shows inflation-adjusted changes in the stock market, as measured by the Dow Jones Industrial Average and S&P 500 Index.

CEO compensation (our realized measure) has, in general, risen and fallen along with the S&P 500 Index over the last five and a half decades. The period from 1965 to 1978 is an exception: Although the stock market fell by roughly half between 1965 and 1978, realized CEO compensation increased by 78.9%.

Typical worker compensation saw relatively strong growth over that period—that is, strong relative to subsequent periods, not relative to CEO pay or the pay of other earners at the top of the wage distribution: Annual worker compensation grew by 20.0% from 1965 to 1978, about a fourth as fast as CEO compensation growth.

Realized CEO compensation grew strongly throughout the 1980s but exploded in the 1990s. It peaked at the end of the stock market bubble, in 2000, at about $22.2 million, a 261% increase over just five years earlier in 1995 and a 1,204% increase over 1978. This latter increase exceeded even the growth of the booming stock market (513% for the S&P 500 and 439% for the Dow) between 1978 and 2000. In stark contrast to both the stock market and CEO compensation, private-sector worker compensation increased just 0.6% from 1978 to 2000.

When the stock market bubble burst in the early 2000s there was a substantial paring back of CEO compensation. By 2007, however, when the stock market had mostly recovered, realized CEO compensation reached $19.7 million, just $2.5 million below its 2000 level. However, granted CEO compensation remained down, at $14.5 million in 2007, a substantial $7.7 million fall from the 2000 level.

The stock market decline during the 2008 financial crisis also sent CEO compensation tumbling, as it had in the early 2000s, as realized CEO compensation dropped 46.6% from 2007 to 2009. After 2009, realized CEO compensation resumed an upward trajectory, growing 130.3% from 2009 to 2020 so that CEO compensation exceeded its previous level from 2007 by 23.0%. In fact, the fast growth of CEO compensation in 2020 brought realized CEO compensation $2 million above its prior peak level in 2000 at the height of the stock market bubble.

To assess the role of CEO compensation in the overall increase in income and wage inequality of the last four decades it is best to gauge growth since 1978.3 For the period from 1978 to 2020, realized CEO compensation increased 1,322.2%—more than 60% faster than stock market growth (depending on the market index used) and substantially faster than the slow 18.0% growth in the typical worker’s compensation over the same period (there was a large 3.9% jump in worker compensation in 2020, much of it likely from a composition effect—low-wage workers missing from employment due to the COVID crisis). CEO granted compensation grew 970.2% over this period.

Trends in the CEO-to-worker compensation ratio

Table 1 also presents trends in the ratio of CEO-to-worker compensation, using both measures of CEO compensation. We compute this ratio, which illustrates the increased divergence between CEO and worker pay over time, in two steps:

• The first step is to construct, for each of the 350 largest U.S. firms, the ratio of the CEO’s compensation to the annual average compensation of production and nonsupervisory workers in the key industry of the firm (data on the pay of workers at individual firms are not available).4
• The second step is to average that ratio across all 350 firms. Note, however, that trends before 1995 are based on the changes in average top-company CEO and economywide private-sector production/nonsupervisory worker compensation.

The last two columns in Table 1 show the resulting ratio for both measures of CEO pay. The trends are depicted in Figure A.

Figure A

As Table 1 and Figure A show, using the realized measure of CEO compensation, CEOs of major U.S. companies earned 21 times more than the typical worker in 1965. This ratio grew to 31-to-1 in 1978 and 61-to-1 by 1989. It surged in the 1990s, hitting 366-to-1 in 2000, at the end of the 1990s recovery and at the height of the stock market bubble.5

The fall in the stock market after 2000 reduced CEO stock-related pay, such as realized stock options, and caused CEO compensation to tumble in 2002 before beginning to rise again in 2003. Realized CEO compensation recovered to a level of 331 times worker pay by 2007, still below its 2000 level. The financial crisis of 2008 and accompanying stock market decline reduced CEO compensation between 2007 and 2009, as discussed above, and the CEO-to-worker compensation ratio fell in tandem.

Over the 2009–2020 period CEO pay resumed its upward trajectory and the 130.3% surge in realized CEO compensation brought the ratio to 351-to-1, above its 2007 level. Though the realized CEO-to-worker compensation ratio remains below the value achieved in 2000 at the peak of a stock market bubble, it is far higher than it was in the 1960s, 1970s, 1980s, and most of the 1990s.

The pattern using the granted measure of CEO compensation is similar. The CEO-to-worker pay ratio peaked in 2000, at 386-to-1, even higher than the ratio with the realized compensation measure. The fall from 2000 to 2007 was steeper than for the other measure, hitting 242-to-1 in 2007. The stock market decline during the financial crisis drove the ratio down to 178-to-1 in 2009. The growth in granted CEO compensation over the 2009–2020 period, at just 28.2%, was far less than for realized compensation, so the CEO-to-worker pay ratio recovered to only 203-to-1. This level is far lower than its peak in 2000 but still far greater than the 1995 ratio of 131-to-1, the 1989 ratio of 45-to-1, or the 1965 ratio of 15-to-1.

The exponential growth in the CEO-to-worker compensation ratio reflects the strikingly different trajectory of CEO pay compared with typical worker pay. On the one hand, there has been very little growth in the compensation of a typical worker since the late 1970s: It has grown just 19.5% over the 40 years from 1979 to 2020, despite a corresponding growth of net economywide productivity of 59.7% (Mishel and Bivens 2021). The 1,322.2% growth in realized CEO compensation from 1978 (there are no data for 1979) to 2020 far exceeded the growth in productivity, profits, or stock market values in that period.

Dramatically high CEO pay does not simply reflect the market for skills

This section reviews competing explanations for the extraordinary rise in CEO compensation over the past several decades. CEO compensation has grown a great deal since 1965, but so has the pay of other high-wage earners. To some analysts, this suggests that the dramatic rise in CEO compensation has been driven largely by the demand for the skills of CEOs and other highly paid professionals. In this interpretation, CEO compensation is being set by the market for “skills” or “talent,” not by managerial power or rent-seeking behavior.6 This explanation lies in contrast to that offered by Bebchuk and Fried (2004) and Clifford (2017), who claim that the long-term increase in CEO pay is a result of managerial power.

The “market for talent” argument is based on the premise that “it is other professionals, too,” not just CEOs, who are seeing a generous rise in pay. The most prominent example of this argument comes from Kaplan (2012a, 2012b). In the prestigious 2012 Martin Feldstein Lecture at the National Bureau of Economic Research, he claims:

Over the last 20 years, then, public company CEO pay relative to the top 0.1% has remained relatively constant or declined. These patterns are consistent with a competitive market for talent. They are less consistent with managerial power. Other top income groups, not subject to managerial power forces, have seen similar growth in pay. (Kaplan 2012a, 4)

In a follow-up paper for the Cato Institute, published as a National Bureau of Economic Research working paper, Kaplan expands this point:

The point of these comparisons is to confirm that while public company CEOs earn a great deal, they are not unique. Other groups with similar backgrounds—private company executives, corporate lawyers, hedge fund investors, private equity investors and others—have seen significant pay increases where there is a competitive market for talent and managerial power problems are absent. Again, if one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why these professional groups have had a similar or even higher growth in pay. It seems more likely that a meaningful portion of the increase in CEO pay has been driven by market forces as well. (Kaplan 2012b, 21)

However, the argument that CEO compensation is being set by the market for “skills” does not square with the available data corresponding to what Kaplan employed. Bivens and Mishel (2013) address the larger issue of the role of CEO compensation in generating income gains at the very top and conclude that substantial rents are embedded in executive pay. According to Bivens and Mishel, CEO pay gains are not the result of a competitive market for talent but rather reflect the power of CEOs to extract concessions.

Here we draw on and update Bivens and Mishel’s 2013 analysis to show that the evidence does not support Kaplan’s claim that “professional groups have had a similar or even higher growth in pay” than CEOs (Kaplan 2012b). Not even close. CEO compensation grew far faster than compensation of very highly paid workers over the last few decades, which suggests that the market for skills was not responsible for the rapid growth of CEO compensation.

Trends in the CEO-to-top-1% compensation ratio

To reach this finding, we use Kaplan’s series (Kaplan 2012b) on CEO compensation (through 2010 and updated forward using CEO realized compensation) and compare it with the wages of the very highest wage earners in the top 0.1% (reflecting W-2 annual earnings, which includes exercised stock options and vested stock awards). We use top wage earners rather than top 0.1% household incomes, as Kaplan did, in order to make the comparisons across earners.7 The wage benchmark seems the most appropriate one because it avoids issues of changing household demographics (e.g., increases in the number of two-earner households over time) and limits the income to labor income (i.e., it excludes capital income, which is included in household income measures).

The data presented in Table 2 show the result of our analysis: We find that, contrary to Kaplan’s findings, the compensation of CEOs has far outpaced that of the top 0.1% of earners. We present the ratio of the average compensation of CEOs of large firms (the series developed by Kaplan, incorporating stock options realized) to the average annual earnings of the top 0.1% of wage earners (based on a series developed by Kopczuk, Saez, and Song [2010] and updated by Mishel and Kandra [2020]) as a simple ratio and as a logged ratio (to convert it to a “premium,” defined as the relative pay differential between two groups) for selected years from 1979 to 2019.

Table 2

Both the simple ratios and the log ratios understate the relative pay of CEOs, because CEO pay is a nontrivial share of the denominator, a bias that has probably grown over time as CEO relative pay has grown. If we were able to remove top CEOs’ pay from the top 0.1% category, it would reduce the average for the broader group.8

But even with this inherent bias, these ratios tell a striking story of excessive growth in CEO pay in recent decades: CEO compensation was 6.44 times the pay of the top 0.1% of wage earners in 2019, substantially higher than the 4.36 ratio in 2007. CEO compensation grew far faster than that of the top 0.1% of earners over the recovery from 2009 to 2019, as the ratio spiked from 4.61 to 6.44. CEO compensation relative to the wages of the top 0.1% of wage earners in 2019 far exceeded the ratio of 2.63 in 1989, a rise (+3.81) equal to the pay of nearly four very-high-wage earners.9

The log ratio of CEO relative pay grew 90 log points from 1989 to 2019 with respect to wage earners in the top 0.1%. CEO compensation grew more slowly than top 0.1% earnings over the 1979–1989 period, so longer-term comparisons back to 1979 show a lesser, but still substantial, rise in CEO compensation relative to other top earners.

Figure B compares the CEO compensation to top 0.1% earnings ratios back to 1947. In 2019 this ratio was 6.44, 3.26 points higher than the historical average of 3.18 over the 1947–1979 period (a relative gain in wages earned by the equivalent of three very-high-wage earners).

Figure B

That CEO compensation grew much faster than the earnings of the top 0.1% of wage earners is not because the top 0.1% did not fare well. The very highest earners—those in the top 0.1% of all earners—saw their annual earnings (including realized stock options and vested stock awards) grow fantastically, though far less than the compensation of the CEOs of large firms: Top 0.1% annual earnings grew a healthy 341% from 1978 to 2019, though that was only a third as much as the 1,096% growth of our measure of realized CEO compensation (see data in Table1).

If CEO pay growing far faster than that of other high earners is evidence of the presence of rents, as Kaplan suggests, one would conclude that today’s top executives are collecting substantial rents, meaning that if they were paid less there would be no loss of productivity or output in the economy.

The large discrepancy between the pay of CEOs and other very-high-wage earners also casts doubt on the claim that CEOs are being paid these extraordinary amounts because of their special skills and the market for those skills. It is unlikely that the skills of CEOs of very large firms are so outsized and disconnected from the skills of other high earners that they propel CEOs past most of their cohort in the top one-tenth of 1%. For everyone else, the distribution of skills, as reflected in the overall wage distribution, tends to be much more continuous, so this discontinuity is evidence that factors beyond skills drive the compensation levels of CEOs.

Trends in the growth of returns to education

For comparison purposes, Table 2 also shows the changes in the gross (not regression-adjusted) college-to-high-school wage premium. This premium is simply how much higher the hourly wages of workers with a (four-year) college degree are relative to hourly wages of workers with only a high school diploma. This premium is a useful data point to examine because some commentators, such as Mankiw (2013), assert that the wage and income growth of the top 1% reflects the general rise in the return to skills, as reflected in higher college wage premiums.

Since 1979, and particularly since 1989, the increase in the logged CEO pay premium relative to other high-wage earners far exceeded the rise in the logged college-to-high-school wage premium, which is widely and appropriately considered to have had substantial growth: The logged college wage premium grew from 0.46 in 1989 to 0.61 in 2019, a far smaller rise than the logged ratio of CEO-to-top-0.1% earnings, a rise from 0.97 to 1.83.

Mankiw’s claim that top 1% pay or top executive pay simply corresponds to the rise in the college-to-high-school wage premium is unfounded (Mishel 2013a, 2013b). Moreover, the data we present here would show even faster growth of CEO relative pay if Kaplan’s historical CEO compensation series (which we use as the basis for the ratios in Table 2) had been built using the Frydman and Saks (2010) series for the 1980–1994 period rather than the Hall and Liebman (1997) data.10

The stock market and CEO pay

There is normally a tight relationship between overall stock prices and CEO compensation. Some commentators draw on this regularity to claim that CEOs are being paid for their performance since, in their view, CEOs’ goal is to raise stock prices.

However, the stock–CEO compensation relationship does not necessarily imply that CEOs are enjoying high and rising pay because their individual productivity is increasing (e.g., because they head larger firms, have adopted new technology, or for other reasons). CEO compensation often grows strongly when the overall stock market rises and individual firms’ stock values rise along with it. This is a marketwide phenomenon, not one based in improved performance of individual firms.

Most CEO pay packages allow pay to rise whenever the firm’s stock value rises; that is, they permit CEOs to cash out stock options regardless of whether the rise in the firm’s stock value was exceptional relative to comparable firms in the same industry. Similarly, vested stock awards increase in value when the firm’s stock price rises in simple correspondence to a marketwide escalation of stock prices. If corporate taxes are reduced and profits rise, leading to higher stock prices, is it accurate to say that CEOs have made their firms perform better?

The connection between CEO pay and overall inequality

Some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no consequences for the vast majority of workers. However, the escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, generating widespread inequality.

In their studies of tax returns from 1979 to 2005, Bakija, Cole, and Heim (2010, 2012) establish that the increases in income among the top 1% and top 0.1% of households were disproportionately driven by households headed by someone who was either a nonfinancial-sector “executive” (including managers and supervisors, hereafter referred to as “nonfinance executives”) or a financial-sector worker (executive or otherwise). Forty-four percent of the growth of the top 0.1%’s income share and 36% of the top 1%’s income share accrued to households headed by nonfinance executives; another 23% for each group accrued to households headed by financial-sector workers (some portion of which were executives).

Together, finance workers (including some who are executives) and nonfinance executives accounted for 58% of the expansion of income for the top 1% of households and 67% of the income growth of the top 0.1%. The income growth of executives is the largest factor that led top 0.1% and top 1.0% incomes to greatly increase over the last four decades.

Our data applies to the CEOs of the very largest firms. We presume that these CEOs set the pay standards followed by other executives—of the largest publicly owned firms, of smaller publicly owned firms, of privately owned firms, and of major nonprofit firms (hospitals, universities, charities, etc.). If so, then CEO compensation is the largest driver of top incomes.

Relative to others in the top 1%, households headed by nonfinance executives had roughly average income growth; those headed by someone in the financial sector had above-average income growth; and the remaining top-1% households (nonexecutive, nonfinance) had slower-than-average income growth. These shares may actually understate the role of nonfinance executives and the financial sector, because they do not account for increased spousal income from these sources in those cases where the head of household is not an executive or in finance.11

High CEO pay reflects economic rents—concessions CEOs can draw from the economy not by virtue of their contribution to economic output but by virtue of their position of power. Alluding to the fictional town in the radio program A Prairie Home Companion, Clifford (2017) describes the Lake Wobegon world of setting CEO compensation that fuels its growth: Every firm wants to believe its CEO is above average and therefore needs to be correspondingly remunerated. But, in fact, CEO compensation could be reduced across the board and the economy would not suffer any loss of output.

Another implication of rising pay for CEOs and other executives is that it reflects income that would otherwise have accrued to others: What these executives earned was not available for broader-based wage growth for other workers. (Bivens and Mishel [2013] explore this issue in depth.) It is useful, in this context, to note that wage growth for the bottom 90% would have been more than 70% faster over the 1979–2019 period had wage inequality not grown.12 Most of the rise of inequality took the form of redistributing wages from the bottom 90%—whose share of wages fell from 69.8% to 60.9%—to the top 1.0%—whose wage share nearly doubled, rising from 7.3% to 13.2%, with most of the increase accruing to the top 0.1%, whose share of all wages grew from 1.6% to 5.0% (Mishel and Kandra 2020).

Policy recommendations: Reversing the trend

Several policy options could reverse the trend of excessive executive pay and broaden wage growth. Some involve taxes:

• Implementing higher marginal income tax rates at the very top would limit rent-seeking behavior and reduce the incentives for executives to push for such high pay.
• Another option is to set corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation. Clifford (2017) recommends setting a cap on compensation and taxing companies on any amount over the cap, similar to the way baseball team payrolls are taxed when salaries exceed a cap.

Other policies that could potentially limit executive pay growth are changes in corporate governance, such as greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

Baker, Bivens, and Schieder (2019) review policies to restrain CEO compensation and explain how tax policy and corporate governance reform can work in tandem: “Tax policy that penalizes corporations for excess CEO-to-worker pay ratios can boost incentives for shareholders to restrain excess pay,” but, “to boost the power of shareholders [to restrain pay], fundamental changes to corporate governance have to be made. One key example of such a fundamental change would be to provide worker representation on corporate boards.”

The CEOs examined in this report head large firms. These large firms, almost by definition, enjoy a degree of market power that some studies suggest has grown in recent decades. It seems that CEOs and other executives may have been prime beneficiaries of these firms’ greater market power. This suggests it could be beneficial to use the tools of antitrust enforcement and regulation to restrain these firms’ market power. This would not only promote economic efficiency and competition, but might help restrain executive pay as well.

Acknowledgments

The authors thank the Stephen Silberstein Foundation for its generous support of this research. Steven Balsam, an accounting professor at Temple University and author of Executive Compensation: An Introduction to Practice and Theory (2007) and Equity Compensation: Motivations and Implications (2013), has provided useful advice on data construction and interpretation over the years. Steven Clifford, author of The CEO Pay Machine: How It Trashes America and How to Stop It (2017), has also provided technical advice. Clifford served as CEO for King Broadcasting Company from 1987 to 1992 and National Mobile Television from 1992 to 2000 and has been a director of 13 public and private companies.

About the authors

Lawrence Mishel is a distinguished fellow and former president of the Economic Policy Institute. He is the co-author of all 12 editions of The State of Working America. His articles have appeared in a variety of academic and nonacademic journals. His areas of research include labor economics, wage and income distribution, industrial relations, productivity growth, and the economics of education. He holds a Ph.D. in economics from the University of Wisconsin at Madison.

Jori Kandra is a research assistant at the Economic Policy Institute. In addition to her work on the CEO pay series, she has worked on the State of Working America 2020 wages report and the domestic workers chartbook, among other EPI publications. She has a bachelor’s degree in economics from the University of Texas at Austin.

Notes

1. In earlier reports our sample each year was sometimes fewer than 350 firms to the extent that these large firms did not have the same CEO for most of or all of the year or the compensation data were not yet available. In order to not let changes in sample size affect annual trends, we examine the top 350 firms with the largest revenues each year for which there are data.

2. We chose which years to present in the table in part based on data availability. Where possible, we chose cyclical peaks (years of low unemployment).

3. A better comparison would be to the low-unemployment year of 1979, but those data are not available.

4. There are a limited number of firms, which existed only for certain years between 1992 and 1996, for which a North American Industry Classification System (NAICS) value is unassigned. This makes it impossible to identify the pay of the workers in the firm’s key industry. These firms are therefore not included in the calculation of the CEO-to-worker compensation ratio.

5. As noted earlier, it may seem counterintuitive that the two ratios for 2000 are different from each other when the average CEO compensation is the same. It is important to understand that (as we describe later in this report) we do not create the ratio from the averages; rather we construct a ratio for each firm and then average the ratios across firms.

6. The managerial power view asserts that CEOs have excessive, noncompetitive influence over the compensation packages they receive. Rent-seeking behavior is the practice of manipulating systems to obtain more than one’s fair share of wealth—that is, finding ways to increase one’s own gains without actually increasing the productive value one contributes to an organization or to the economy.

7. We thank Steve Kaplan for sharing his CEO compensation series with us (Kaplan 2012b). The series on the income of the top 0.1% of households that Kaplan used is no longer available. Moreover, as we discuss, the appropriate comparison is to other earners, not to households, which could have multiple earners and shifts in the number of earners over time.

8. Temple University professor Steve Balsam provided tabulations from the Capital IQ database of annual wages of executives exceeding the wage thresholds (provided to him based on the Social Security Administration data used in Mishel and Kandra 2020) that place them in the top 0.1% of wage earners. There were 38,824 executives in publicly held firms in 2007; of those, 9,692 executives were in the top 0.1% of wage earners. These 9,692 executives had average annual earnings of $4.4 million. Using Mishel et al.’s (2012) estimates of top 0.1% wages, we find that executive wages make up 13.3% of total top 0.1% wages. One can gauge the bias of including executive wages in the denominator by noting that the ratio of executive wages to all top 0.1% wages in 2007 was 2.14 but the ratio of executive wages to nonexecutive wages was 2.32. We do not have data that would permit an assessment of the bias in 1979 or 1989. We also lack information on the number and wages of executives in privately held firms: to the extent that their CEO compensation exceeds that of publicly held firms, their inclusion would indicate an even larger bias. The Internal Revenue Service Statistics of Income (SOI) Bulletin reports that there were nearly 15,000 corporate tax returns in 2007 of firms with assets exceeding $250 million (IRS 2019). Given that the total number of publicly held firms in the United States was roughly 5,000 in 2007 (Bloomberg 2018), the majority of these 15,000 tax returns had to have come from privately held companies, meaning there is a much larger number of executives of large firms than we are able to capture through data on publicly held firms.

9. A one-point rise in the ratio is the equivalent of the average CEO earning an additional amount equal to that of the average earnings of someone in the top 0.1%.

10. Kaplan (2012b, 14) notes that the Frydman and Saks series grew 289% whereas the Hall and Liebman series grew 209%. He also notes that the Frydman and Saks series grew faster than the series reported by Murphy (2012).

11. The tax data analyzed categorizes a household’s income according to the occupation and industry of the head of household. It is possible that a “secondary earner,” or spouse, has income earned as an executive or as a financial-sector worker. If the household is in the top 1.0% or top 0.1%, but the head of household is not an executive or in finance, then the spouse’s contribution to income growth will not be identified as being connected to executive pay or financial-sector pay. The discussion in this paragraph draws on Bivens and Mishel 2013.

12. This follows from the fact that over 1979–2019 annual earnings for the bottom 90% rose by 26.0%, while the average growth across all earners was 44.6% (Mishel and Kandra 2020). That means that the bottom 90% would have seen their earnings grow 18.6 percentage points more over the 1979–2019 period if they had enjoyed average growth (i.e., no increase in inequality, 44.6 less 26.0).

References

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An examination of the early filings of 281 large firms shows:

• The offer by CEOs to forgo salary increases during the pandemic was largely symbolic. Salaries were stable, but many CEOs pocketed a windfall by cashing in stock options and obtaining vested stock awards, compounding income inequalities laid bare during the past year.
• CEO compensation, including realized stock options and vested stock awards, rose 15.9% from 2019 to 2020 among early reporting firms. Growth in CEO compensation was slightly faster than last year’s strong growth—14.0% between 2018 and 2019—while the annual compensation of the average worker increased just 1.8% in 2020.
• Strong CEO compensation growth and modest growth in worker annual compensation yielded a remarkable growth in the CEO-to-worker compensation ratio, which jumped from 276.2 in 2019 to 307.3 in 2020 among early-reporting firms. In firms that retained the same CEO, the CEO-to-worker compensation ratio rose to 341.6 in 2020, up from 278.9 in 2019.

The Institute for Policy Studies also looked at a more limited sample of early-reporting firms (the 100 S&P 500 firms with the lowest median worker pay) and found CEO compensation grew by 15%.

Given that stock-related components of CEO compensation make up roughly three-fourths of total CEO compensation (see Table 1 of Mishel and Kandra 2020), this growth in CEO compensation might be expected given the rapid growth of stocks since the end of 2019 (see Figure A, showing 16.3% growth of S&P 500 from December 2019 to December 2020). The growth of CEO compensation was very uneven across firms, as we show below.

Figure A

Our regular annual report on CEO compensation trends presents data on the 350 largest firms that report by the end of June each year. This post provides an early look at 2020 CEO compensation trends by examining the pay packages of firms that are early reporters—the 281 large firms in our sample from last year’s report that have already reported (by the end of April 2021) on CEO compensation for 2020. We also examine the subset of 239 firms among these early-reporting firms that had the same CEO in both years.

We report two measures of CEO compensation. The first is “realized direct compensation,” a measure incorporating salary, bonus, long-term incentive payouts, stock options exercised, and vested stock awards. We also report on a “granted compensation” measure of CEO compensation that has the same components, except that the stock-related items (stock options and stock awards) are valued when granted rather than when exercised or vested. Further technical details about our data and definitions are available in Mishel and Kandra 2020.

Table 1 provides our analysis. Realized compensation rose $2.9 million (up 15.9%), from $18.5 million to $21.4 million, at the 281 early-reporting firms. The increase was substantially larger among firms where the CEO remained in place: Realized compensation rose $5.3 million (up 28.7%), from $18.5 million to $23.8 million.

Table 1

These large increases in CEO compensation occurred even though CEO salaries were stable (many CEOs offered to not take salary increases, something entirely symbolic given the growth of the other components of compensation). An assessment of the individual components of compensation show that CEO compensation increases were driven entirely by the huge increase in the value of exercised stock options and vested stock awards in 2020, presumably to take advantage of the high stock prices. Realized stock options for CEOs that stayed in place rose by 81%, up $3.6 million, and accounted for 68% of the total rise in realized compensation. Vested stock awards grew by 1.9 million and accounted for 36% of the rise in realized compensation. Bonuses, salaries, and long-term incentives actually fell.

While growth in CEO compensation was faster than last year’s growth (14.0% between 2018 and 2019), the annual compensation of the average worker (which is a proxy measure for the pay of typical workers within these firms, as detailed in Mishel and Kandra 2020) increased just 1.8% in 2020. The lack of growth in worker compensation and the immense growth in CEO compensation yielded a remarkable growth in the CEO-to-worker compensation ratio, which jumped from 276.2 in 2019 to 307.3 in 2020 among early-reporting firms (Table 2). In firms that retained the same CEO, the CEO-to-worker compensation ratio rose to 341.6 in 2020, up from 278.9 in 2019.

Table 2

The growth of CEO compensation was far from uniform. As Table 1 shows, the median CEO (who had realized compensation growth that was more than half the other CEOs but also less than half the other CEOs) across all firms saw stable compensation growth, far less than the average increase of 15.9%. Similarly, the median growth of realized compensation among early-reporting firms that retained their CEO was 5.2% (rising $314,000), far less than the 28.7% increase on average.

This pattern of CEO compensation growth reflects the wide array of increases with the CEOs of some firms enjoying multiple-hundred-percent compensation growth while others had much smaller increases (see Figure B). For instance, six CEOs had compensation rise more than 500%, another 10 CEOs had compensation grow between 200% and 345%, and an additional 29 other CEOs saw their compensation more than double. At the same time, roughly half (143) of the 281 early-reporting firms provided lower realized CEO compensation in 2020 than in 2019, including 111 of 239 firms who retained their CEO. Our analysis showed no relationship between changes in CEO realized compensation and the growth of the specific firm’s stock price (from the end of 2019 to the end of 2020).

Figure B

This analysis of CEO compensation indicates that the stock market’s growth in 2020 has contributed to a major leap forward in CEO compensation, compounding the income and wealth inequalities that have emerged in the pandemic. There are also examples of firms making “discretionary adjustments” to their compensation schemes to shield CEOs from “the pandemic’s adverse impact on the company’s financial results.” Such adjustments, of course, were not made for rank-and-file workers.

The Institute for Policy Studies report shows that 51 of the 100 S&P firms with the lowest median pay “bent their own rules to pump up executive paychecks” and “provided a 29% boost to executive pay, far more than the other firms.” The impact of these adjustments on the growth of CEO compensation will be fruitful to analyze as more data emerge. Our regular report on CEO compensation of the 350 largest firms will be available in July.

What this report finds: Corporate boards running America’s largest public firms are giving top executives outsize compensation packages that have grown much faster than the stock market and the pay of typical workers, college graduates, and even the top 0.1%. In 2019, a CEO at one of the top 350 firms in the U.S. was paid $21.3 million on average (using a “realized” measure of CEO pay that counts stock awards when vested and stock options when cashed in rather than when granted). This 14% increase from 2018 occurred because of rapid growth in vested stock awards and exercised stock options tied to stock market growth. Using a different “granted” measure of CEO pay, average top CEO compensation was $14.5 million in 2019. In 2019, the ratio of CEO-to-typical-worker compensation was 320-to-1 under the realized measure of CEO pay; that is up from 293-to-1 in 2018 and a big increase from 21-to-1 in 1965 and 61-to-1 in 1989. CEOs are even making a lot more—about six times as much—as other very high earners (wage earners in the top 0.1%). From 1978 to 2019, CEO pay based on realized compensation grew by 1,167%, far outstripping S&P stock market growth (741%) and top 0.1% earnings growth (which was 337% between 1978 and 2018, the latest data year available). In contrast, compensation of the typical worker grew by just 13.7% from 1978 to 2019.

Why it matters: Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. CEOs are getting more because of their power to set pay—and because so much of their pay (about three-fourths) is stock-related, not because they are increasing productivity or possess specific, high-demand skills. This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or were taxed more).

How we can solve the problem: We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so. Such policies could include reinstating higher marginal income tax rates at the very top; setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation; establishing a luxury tax on compensation such that for every dollar in compensation over a set cap, a firm must pay a dollar in taxes; reforming corporate governance to give other stakeholders better tools to exercise countervailing power against CEOs’ pay demands; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.