Portside

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 2021, we project that a CEO at one of the top 350 firms in the U.S. was paid $27.8 million on average (using a “realized” measure of CEO pay that counts stock awards when vested and stock options when cashed in and ownership is taken). This 11.1% increase from 2020 occurred because of rapid growth in vested stock awards. Using a different “granted” measure of CEO pay (which counts the value of stock awards and options when announced (or “granted” rather than realized), average top CEO compensation was $15.6 million in 2021, up 9.8% since 2020. In 2021, the ratio of CEO-to-typical-worker compensation was 399-to-1 under the realized measure of CEO pay; that is up from 366-to-1 in 2020 and a big increase from 20-to-1 in 1965 and 59-to-1 in 1989. CEOs are even making a lot more than other very high earners (wage earners in the top 0.1%)—almost seven times as much. From 1978 to 2021, CEO pay based on realized compensation grew by 1,460%, far outstripping S&P stock market growth (1,063%) and top 0.1% earnings growth (which was 385% between 1978 and 2020, according to the latest data available). In contrast, compensation of the typical worker grew by just 18.1% from 1978 to 2021.

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.

To read the full report, click here.