CEO Pay Has Risen 940% Since 1978

A new study by the Economic Policy Institute provides one of the most detailed looks at historic CEO and worker pay and finds the game is fixed. Average CEO pay has risen by an astounding 940 percent since 1978, and during that same 40-year period worker pay rose just 12 percent.

And that’s using a conservative estimate of the value of stock options when given. If the value of the options when cashed in is used, CEO pay rose by 1008 percent since 1978. 

Why this astounding growth? 

“CEOs are getting more because of their power to set pay, 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%.”

CEO pay hasn’t just risen far faster than average worker pay. “CEOs are even making a lot more—about five times as much—as other earners in the top 0.1%,” the study notes. Those other members of the top 0.1 percent have seen their compensation rise by a stunning 339 percent during the four decades since 1978, yet that increase was just one-third of the pay hike for CEOs. 

The report’s analysis concludes the economy “would suffer no harm if CEOs were paid less (or taxed more),” and it suggests ways to address the problem, including: 

-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 pay; 

-a luxury tax on companies: for every dollar in compensation over a set cap, a firm must pay a dollar in taxes; 

-reforming corporate governance to give other stakeholders greater power to resist CEOs’ pay demands;  

-allowing greater use of “say on pay,” which permits a firm’s shareholders to vote on top executives’ compensation.

The study’s lead author Lawrence Mishel is a distinguished fellow and former president of the liberal Economic Policy Institute who has studied wage and income distribution for many years. He and co-author Julia Wolfe found that “average CEO compensation attained its peak in 2000, at the height of the late 1990s tech stock bubble, at $21.5 million (in 2018 dollars.” While CEO pay fell somewhat after that in real dollars it has grown 53 percent in the recovery from the Great Recession while “the typical workers in these large firms saw their annual compensation grow by just 5.3%… and actually fall by 0.2% between 2017 and 2018.”

The study looked at the top 350 corporations in America and found the average CEO now earns $17.2 million (as of 2018), down somewhat from the 2000 peak but still 278 times more than the average worker earns. That compares to a 30-to-1 ratio in 1978, the report found. 

Wisconsin’s corporations have been a part of that trend, as I’ve written, with CEOs of top companies like Manpower, Kohl’s and Rockwell Automation getting huge compensation, topped by the $12.4 million going to Fiserv CEO Jeffery Yabuki. CEO salaries typically go up along with the size of companies and as Wisconsin’s top corporations are smaller so are the CEO salaries.

Past studies have found that CEOs get huge raises even when their company does poorly. This report found these pay hikes are not about rewarding a key worker’s skills, but about cashing in on the stock market. “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 that firm’s competitors.”

It’s not that there isn’t a market for talent in the U.S. that is leaving some workers behind. The study tabulates research showing college educated workers earn 1.8 times more than those lacking a degree, and notes that non-CEOs in the top .01 percent have seen their compensation rise by 339 percent versus 12 percent for average workers since 1978. But top CEO pay is rising at multiples that bear no resemblance to this, rising five times more than other members of the top 01 percent in the last ten years, the study finds. 

The stratospheric difference in pay hikes at the top of the ladder “indicates that CEO compensation growth does not simply reflect a competitive race for skills (the “market for talent”)… but the power of CEOs to extract concessions,” the study notes.  

That power has been well-documented by other research showing that CEOs serve on each other’s corporate boards and are generous to each other. They pay the fees of corporate compensation consultants, who typically recommend generous raises, studies show. They pay the fees of board directors, who were paid an average of $255,000 in 2014 at the top 500 companies. And the board members who earn these fees for a few hours work per week are, in turn, generous to the executives who pay them.

Urban Milwaukee’s Data Wonk columnist Bruce Thompson has pointed to another factor at work: the rise of stock buybacks by companies, which do nothing to improve the company but simply hike the value of the stock for CEO’s, company board members and shareholders. Such buybacks had been considered stock manipulation until a 1982 rule change by the federal SEC changed this.

While “some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no consequences for the vast majority of workers,” the report notes, it is actually the main driver fueling the wealth gap in America. 

Rising CEO pay “has had spillover effects, pulling up the pay of other executives and managers, who constitute more than 40% of all top 1.0% and 0.1% earners,” the study finds. “Consequently, the growth of CEO and executive compensation overall was a major factor driving the doubling of the income shares of the top 1% and top 0.1% of U.S. households from 1979 to 2007.”

It’s all about access to stock rewards, which go lavishly to executives, with nothing for average workers. Executives and others who work in the financial industry, along with all other (non-financial) corporate executives together “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 study found.

As a result, the richest 10 percent of Americans now own 84 percent of the value of all stocks, while most Americans own no stocks at all. And the wealth gap in America is the greatest it’s been for more than a century. 

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