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Economic Policy Institute: CEOs Recovering Well, Workers Not So Much

Economic Policy Institute: CEOs Recovering Well, Workers Not So Much
CEOs Recovering Well, Workers Not So Much originally appeared on the Economic Policy Institute (EPI) blog

Escalating CEO compensation is a major contributor to income inequality. Along with financial sector pay, growing CEO compensation has helped more than double the income share of the top 1 percent over the past three decades. Moreover, the fact that CEO pay has risen so quickly since the end of the Great Recession is an indicator that the top 1 percent is doing far better than ordinary Americans in the recovery.

One way to illustrate the increased divergence between CEO pay and an average worker’s pay over time is to examine the ratio of CEO compensation to that of a typical worker, the CEO-to-worker compensation ratio. Our new EPI paper, CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners, presents this analysis of CEO compensation based on our tabulations of Compustat’s ExecuComp data. The ratio measures the distance between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.

The CEO-to-worker compensation ratio1 in 2012 of 272.9 is far above the ratio in 1995 (122.6), 1989 (58.5), 1978 (29.0), and 1965 (20.1). This illustrates that CEOs have fared far better than the average worker over the last several decades. It is also true that CEO compensation has grown far faster than the stock market or the productivity of the economy.

In fact, average CEO compensation was $14.1 million in 2012, using a measure of CEO pay that includes the value of stock options exercised in a given year, up 12.7 percent since 2011 and 37.4 percent since 2009. Over the entire period from 1978 to 2012, CEO compensation measured with options realized increased about 875 percent, a rise more than double stock market growth and substantially greater than the painfully slow 5.4 percent growth in a typical worker’s compensation over the same period.

The increase in CEO pay over the past few years reflects improving market conditions driven by macroeconomic developments and a general rise in profitability. For most firms, corporate profits continue to improve and corporate stock price is moving accordingly. It seems evident that individual CEOs are not responsible for this broad improvement in profits in the past few years, but they clearly are benefiting from it. The stark increases in CEO compensation do not simply, or even primarily, reflect an increase in their contribution to productivity.

This analysis makes it clear that the economy is recovering for some Americans, but not for most. The stock market and corporate profits have rebounded following the Great Recession, but the labor market remains very sluggish. Those at the top of the income distribution, including many CEOs, are seeing a strong recovery, while the average worker is still experiencing the detrimental effects of a stagnant labor market.

1. This blog post uses the “Options realized” compensation data series which includes salary, bonuses, restricted stock grants, options exercised and long-term incentive payouts for CEOs at the top 350 firms ranked by sales. Though EPI also calculates a measure using the value of options granted rather than exercised, this is our preferred metric and the one most commonly used in economic research. See more at: www.epi.org/blog/ceos-recovering-not-workers/#sthash.bpWK6EA9.dpuf.

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