Our Times (2021)

[Hilda Bagnoli]

Welive in a world of worry. The ongoing Covid-19 pandemic, having driven reversals in human development in almost every country, continues to spin off variants unpredictably. War in Ukraine and elsewhere has created more human suffering. Record-breaking temperatures, fires, storms and floods sound the alarm of planetary systems increasingly out of whack. Together, they are fuelling a cost-of-living crisis felt around the world, painting a picture of uncertain times and unsettled lives.

GTA Online. Infamous for its slow loading times. Having picked up the game again to finish some of the newer heists I was shocked (/s) to discover that it still loads just as slow as the day it was released 7 years ago.

After taking a minute to load the common resources used for both story and online modes (which is near on par with high-end PCs) GTA decides to max out a single core on my machine for four minutes and do nothing else.

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).

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

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.

First, interests can be aligned with compensation measures at much lower scales than what commonly prevails. Yes, it may make some sense to provide stock options to a CEO to incentivize the CEO to take measures that will boost shareholder returns. But is it really necessary to give a CEO options on 16 million shares of stock (which is how many shares Musk exercised options on in 2021) to achieve this goal?

Another issue involves differentiating share price growth that is company-specific versus that which is driven by overall market trends. Company-specific share price increases are at least plausibly related to CEO performance. Share prices that rise because the entire stock market has risen are much less so. Most stock-related compensation of CEOs does a very poor job (by design) of drawing such distinctions and preventing CEOs from being rewarded simply for luck.

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.

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%.

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.

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 Securities and Exchange Commission (SEC) now requires publicly owned firms to provide a metric for the ratio of CEO compensation to that of the median worker in a firm, as mandated by the Dodd-Frank financial reform bill of 2010 (SEC 2015). Those ratios differ from those in this report in several ways:

There is certainly value in the new metrics being provided to the SEC, but the measures we rely on allow us to make appropriate comparisons between firms and across time. More information on the SEC CEO-to-worker compensation ratio and our comparable measure can be found in Mishel and Kandra 2020.

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.

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.

Notes: Wages of top 0.1% of wage earners reflect W-2 annual earnings, which includes the value of exercised stock options and vested stock awards. The college-to-high-school wage ratios compare hourly wages of workers who have a college degree with hourly wages of workers who have only a high school education.

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 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.

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.

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