“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). Both include salary, bonus, and long-term incentive payouts, but the “granted” measure includes the value of stock options and stock awards when they were granted, whereas the “realized” measure captures the value of stock-related components that accrues after options or stock awards are granted by including “stock options exercised” and “vested stock awards.” FH=First half. The fall from 2000 to 2007 was steeper than for the other measure, hitting 242-to-1 in 2007. According to the authors of a report titled Rewarding or Hoarding? It is possible that a “secondary earner,” or spouse, has income as an executive or in finance. The generally tight link between stock prices and CEO compensation indicates that CEO pay is not being established by a “market for talent,” as pay surged with the overall rise in profits and stocks, and not with the better performance of a CEO’s particular firm relative to the performance of that firm’s competitors. Washington, D.C.: WorldatWork Press. Specifically, the SEC’s rule grants firms significant discretion in reporting median worker pay, which makes the reported ratios incompatible across firms. This follows from the fact that over 1979–2017 annual earnings rose by 22.2% for the bottom 90%, while the average growth across all earners was 40.1% (Mishel and Wolfe 2018). Privacy Policy • Contact Us. Economic Policy Institute Briefing Paper no. 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. It allows us to avoid artificially lowering the estimated change in CEO compensation in 2019 relative to last year and earlier years.5. This discontinuity, and associated possible measurement error, does not matter a great deal for our analysis since our focus is on longer-term trends, analyzing CEO compensation trends since 2007, the year before the financial crisis that sparked the Great Recession, or since 2009, the beginning of the recovery from the Great Recession. * Average annual compensation of the workers in the key industry of the firms in the sample. 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. These patterns are consistent with a competitive market for talent. Appendix Figure B shows how the use of the vested value rather than the fair value of stock awards affects the overall trend of CEO compensation. In-depth analysis of CEO pay Actual CEO salaries at national associations and nonprofits with revenues of more than $1.7 million; Five salary categories, including base pay, bonuses and deferred compensation Interactive tools and videos bringing clarity to the national dialogue on economic inequality. Analyses of the underlying components of CEO compensation over the 2016–2018 period… showed a strong growth in stock awards, which are simply stocks granted to employees. CEO compensation often grows strongly when the overall stock market rises and individual firms’ stock values rise along with it. Appendix Table 1 provides an assessment of how the growth of CEO compensation over key periods is affected by our change of metrics. The stock-related components of CEO compensation constitute a large and increasing share of total compensation: realized stock awards and stock options (column 10) were 73.1% of total compensation in 2016 and 78.6% in 2019. As the share of CEO compensation represented by stock options declines, and the share represented by stock awards grows, CEO compensation levels and growth will possibly be increasingly understated in our measures as well as in other measures, including those used by companies to construct the CEO-to-worker ratios reported to the SEC. Each year’s sample includes the largest 350 firms for which ExecuComp provides data. Executive Compensation How do taxes and spending work, and where do you fit in? Contact Us. Our methodology (described in Sabadish and Mishel 2013) has a number of advantages over the SEC-prescribed methodology for constructing ratios. 2019. Mishel, Lawrence. Workforce Planning 2013. Steven Clifford, author of The CEO Pay Machine: How It Trashes America and How to Stop It (2017), has also provided technical advice. Realized CEO compensation in 2019 remained below its stock market bubble 2000 peak, but was only off the peak by $627,000, or 2.9%. Because the revised measure is greater in 2018 than our prior metric, the growth measured over the longer term will be greater: specifically, the growth between r 1978 or 2000 and now is greater (less of a fall since 2000, which was the stock bubble–related peak of CEO compensation, and much more since 1978) because of the change in measurement. New York: Penguin Random House. Although the analyses in this report predate the economic shock of the coronavirus pandemic, there is a renewed focus on CEO pay because so many American workers are out of work or have seen their hours or wages cut. That made Kennedy, its 47-year-old CEO, the second-highest-paid executive in 2018 among companies traded on U.S. exchanges, according to the Bloomberg Pay Index. “Typical worker” compensation is the average annual compensation (wages and benefits of a full-time, full-year worker) of production/nonsupervisory workers in the industries that the top 350 firms operate in. It stalled from 2014 to 2018. Steven Balsam, an accounting professor at Temple University and author of Equity Compensation: Motivations and Implications (2013), has provided useful advice on data construction and interpretation over the years. 9. 49, October 12, 2016. “Defending the One Percent.” Journal of Economic Perspectives 27, no. Kaplan, Steven N. 2012a. ExecuComp [commercial database]. 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. Realized CEO compensation recovered to a level of 331 times worker pay by 2007, still below its 2000 level. 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 typical worker pay. 2019. The reason is this: The exact compensation earned through stock options is measurable—the exercised-options measure of compensation captures any rise in the stock price from the time the options are granted. 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%. In stark contrast to both the stock market and CEO compensation, private-sector worker compensation increased just 0.6% over the same period. Capability Building “Are CEOs Really Paid Like Bureaucrats?” National Bureau of Economic Research Working Paper no. Southern Company’s CEO, Tom Fanning, received approximately $28 million in executive compensation in 2019, making him the highest paid utility CEO last year. 2019. The consistent basis of the measurement of our ratios permits historical comparisons on a year-to-year basis. Advocates, investors, and researchers alike have welcomed the disclosure of this information, because these disclosures offer previously unavailable insight into compensation inequality within firms. Raising America’s Pay: Why It’s Our Central Economic Policy Challenge. Frydman, Carola, and Raven E. Saks. The Conference Board recently released CEO and Executive Compensation Practices: 2019 Edition, which documents trends and developments on senior management compensation at companies issuing equity securities registered with the US Securities and Exchange Commission (SEC) and, as of May 2019, included in the Russell 3000 Index. 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. Pay Equity In contrast, compensation of the typical worker grew by just 13.7% from 1978 to 2019. Figure A shows how realized CEO compensation historically fluctuates in tandem with the stock market, as measured by the S&P 500 Index, confirming that CEOs tend to cash in their options when stock prices are high and accumulate unexercised options when stock prices are low. 1997. The pattern using the granted measure of CEO compensation is similar. It may seem counterintuitive that the granted and realized CEO-to-worker pay ratios for 2000 are different from each other when the average CEO compensation is the same. “Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges.” National Bureau of Economic Research Working Paper no. 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. 13. Temple University professor Steve Balsam provided tabulations from the Capital IQ database of annual wages of executives exceeding the wage thresholds (provided to him) that place them in the top 0.1% of wage earners. It seems more likely that a meaningful portion of the increase in CEO pay has been driven by market forces as well. 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. Where possible, we chose cyclical peaks (years of low unemployment). Nor are they captured in the SEC measure. 2013b. For comparison, Table 2 also presents 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 2020a), allowing us to compare CEO compensation with that of a typical worker. 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. The topic of CEO compensation can evoke provocative headlines to stir controversy, but the data can be misleading and especially problematic for companies that use this data for benchmarking pay against peers. It peaked at the end of the stock market bubble, in 2000, at about $21.9 million, a 261% increase over just five years earlier in 1995 and a 1,204% increase over 1978. CEO-to-worker pay ratios: The new SEC rule and EPI’s methodology. 5. Organizational Benchmarks, ADVICE 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. Given the limitations of the metrics used for SEC reporting, the SEC compensation data do not supplant the need for our annual CEO compensation series. As business priorities shift, there will be an added level of complexity when designing executive compensation policies. So, using a fair market value measure of stock awards at the time awards were granted understates the compensation actually received by executives—and this understatement is increasingly acute in recent years as stock awards have become a greater share of compensation, necessitating a change in how we measure CEO compensation. “Executive Compensation: A New View from a Long-Term Perspective, 1936–2005.” Review of Financial Studies 23, no. Listed below are the 10 highest-paid executives in 2019 and ranked according to the Bloomberg Pay Index. “The Politics of Pay: A Legislative History of Executive Compensation.” University of Southern California Marshall School of Business Working Paper no. 2018. © 2021 Economic Policy Institute According to our data, Watsco, Inc. has a market capitalization of US$8.2b, and paid its CEO total annual compensation worth US$11m over the year to December 2019. 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 late 1970s. In order to calculate the projected full-year 2019 value of the vested stock awards we assume that the vested stock awards as a share of CEO realized compensation for first-half-year 2019 remains consistent for the full-year 2019. Note: The revised measure of realized CEO compensation includes the value of realized stock options and vested stock awards. The inflation-adjusted annual earnings of the top 0.1% grew 337% from 1978 to 2018 (Mishel and Kassa 2019). Compustat. By industry, major increases are seen in manufacturing, FMCG followed by all financial industries. Various years. See related work on Economic inequality, Wages, CEO Pay, and Employer power and monopsony. Source: Authors’ analysis of data from Compustat’s ExecuComp database and the Federal Reserve Economic Data (FRED) database from the Federal Reserve Bank of St. Louis. Previous reports used the value of stock awards as granted in both the realized and granted compensation measures, so that the measures differed in only their treatment of stock options. Finally, the table shows changes in the stock market, as measured by the Dow Jones Industrial Average and S&P 500 Index. As Figure B shows, using the realized measure of CEO compensation, CEOs of major U.S. companies earned 21 times as much as the typical worker in 1965. For the period from 1978 to 2019, realized CEO compensation increased 1,166.8%—roughly 50% as fast as stock market growth (depending on the market index used) and substantially faster than the painfully slow 13.7% growth in the typical worker’s compensation over the same period. Economic Policy Institute, February 2020. Economic Policy Institute, August 2019. His articles have appeared in a variety of academic and nonacademic journals. Murphy, Kevin. There were 38,824 executives in publicly held firms and 9,692 people in the top 0.1% of wage earners in 2007, according to the Capital IQ database (tabulations provided by Temple University professor Steve Balsam). The tax data analyzed categorizes a household’s income according to the occupation and industry of the head of household. 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. Both include salary, bonus, and long-term incentive payouts, but the “granted” measure includes the value of stock options and stock awards when they were granted, whereas the “realized” measure captures the value of stock-related components that accrues after options or stock awards are granted by including “stock options exercised” and “vested stock awards.” Projected value for 2019 is based on the percent change in CEO pay in the samples available in June 2018 and in June 2019 applied to the full-year 2018 value. Realized CEO compensation fell again during the financial crash of 2008–2009 and rose strongly after 2009 and with the strong growth in 2019 regained and exceeded its 2007 pre-financial crisis level but in 2019 still remained below the 2000 peak level. We do not have data that would permit an assessment of the bias in 1979 or 1989. Participating in Aon’s Total Compensation Measurement (TCM) Survey gets you access to key pay trends, including movements in total CEO pay year-over-year. The pre-2006 measure is similar conceptually to the fair market value but not exactly the same. An Examination of Pay Ratios Revealed by Dodd-Frank, from the office of former Congressman Keith Ellison (D-Minn.), “These new data give us a much clearer picture as to which corporations are sharing the wealth and which are not” (Staff of Congressman Keith Ellison 2018). The measure of stock awards used in both of our CEO compensation metrics was the fair value of stock awards: the number of shares granted times the stock price at the grant date. Differences but also differences in annual proxy statements through June of 2019 of. Than it was in the edgar filing system % higher than in 1978 and 61-to-1 by 1989 a value! The financial crisis of 2008 and the ratio of CEO-to-worker compensation ratios are based on the in! 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