And this growing power at the top has been driving the growth of inequality in our country. CEO pay growth 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.3 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 (Bakija, Cole, and Heim 2012; Bivens and Mishel 2013). An Examination of Pay Ratios Revealed by Dodd-Frank. 378, June 2014. 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). Last year’s most highly paid CEO received total compensation of $53 million, only $2.2 million of which was paid in salary and bonuses. However, fierce business resistance to the mandate to report the CEO-to-worker compensation ratio has watered down their potential use. 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. An examination of trends in the number and value of unexercised stock options for the same sample of executives confirms that there has been a shift away from options awards rather than an accumulation of unexercised stock options being held to cash in as stock prices rise further. It thereby eliminates artificial reductions in a company-reported CEO-to-worker pay ratio that could arise from the extensive use of subcontracting. Steven Clifford, former CEO compensation consultant and author of The CEO Pay Machine: How It Trashes America and How to Stop It (2017), has also provided technical advice. Meet Mike Duke, king of the CEO-to-worker pay ratio. ... Duke, who raked in $23.15 million last year, contended in December that the retail giant pays "competitive wages." Note: 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 diploma. “Working as Designed: High Profits and Stagnant Wages.” Working Economics (Economic Policy Institute blog), March 28, 2013. The fact that they have nothing to lose—but potentially a lot to gain—might lead options-holding CEOs to take excessive risks to bump up the stock price. By 2014 the stock market had recouped all of the value it had lost following the financial crisis, and the CEO-to-worker compensation ratio in 2014 had recovered to 296-to-1. Public companies are now into the second year of compliance with disclosing the pay ratio calculations between CEOs and their median paid employee, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.Many public companies are still trying to understand how the new disclosure rules apply to them for this year and the coming year. See related work on Economic inequality | Wages | CEO Pay, See more work by Lawrence Mishel and Julia Wolfe. The CEO of one of the top 350 U.S. firms was paid average realized compensation of $21.3 million in 2019, according to the latest study of CEO compensation released Tuesday by the Economic Policy Institute (EPI). A company’s reported “median worker” may, for example, work part time or full time, reside in the U.S. or abroad, and have worked for the firm for a limited number of weeks during the previous year. Projected value for 2018 is based on the percent change in CEO pay in the samples available in June 2017 and in June 2018 (labeled first-half [FH] data) applied to the full-year 2017 value. This latter increase exceeded even the growth of the booming stock market (513% for the S&P 500 and 439% for the Dow) between 1978 and 2000. Nor are they captured in the SEC measure. b. Policy choices have tilted the playing field toward the rich and corporations. The composition of CEO compensation has been shifting toward stock awards and away from stock options since the end of the last cycle in 2006–2007. In a follow-up paper for the Cato Institute, published as a National Bureau of Economic Research working paper, Kaplan expands this point: The point of these comparisons is to confirm that while public company CEOs earn a great deal, they are not unique. An Economic Policy Institute book. CEO David M. Zaslav earned $156 million in 2014 while median worker pay, based on Glassdoor salary reports, was $80,000, for a pay ratio of 1,951. Sears: a pay ratio of 264 to 1, with median worker paid $16,442; Smart & Final, a West Coast retailer, a pay ratio of 462 to 1, with median employee paid $19,618 and CEO pay at $9.7 million. Importantly, rising CEO pay does not reflect rising value of skills, but rather CEOs’ use of their power to set their own pay. Why give to EPI The inflation-adjusted annual earnings of the top 0.1% grew 339.2% from 1978 to 2017. CEO compensation recovered to a level of 346 times worker pay by 2007, almost back to its 2000 level. Assuming a 40-hour workweek for full-time rank-and-file workers employed by companies with 500 or more workers, who received average hourly compensation of $36.65 last year including fringe benefits (BLS data here), and annual total compensation of $73,300, we would get aCEO-to-worker compensation ratios of 177-to-1 u… 1: 91–128. Together, finance workers (including some share who are executives) and nonfinance executives 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%. Box A provides more information on the ratios firms are providing to the SEC. Additionally, in recent years firms reporting later in the year have tended to be firms with lower worker compensation levels and therefore higher CEO-to-worker compensation ratios. 9. Authoritative, up-to-date data on the living standards of American workers. Various years. Economic Policy Institute, August 2018. 7. To reach this finding, we use Kaplan’s series on CEO compensation and compare it with the wages of top wage earners, rather than the household income of the top 0.1% as Kaplan did.11 The wage benchmark seems the most appropriate one because it avoids issues of changing household demographics (e.g., increases in the number of two-earner households over time) and limits the income to labor income (i.e., it excludes capital income, which is included in household income measures). Fourth, our series is able to extend back to 1965, allowing us to analyze trends in executive compensation over time. New research, insightful graphics, and event invites in your inbox every week. As the 2018 proxy season ensued, Pearl Meyer and Main Data Group began collecting and analyzing extensive data on the inaugural CEO Pay Ratio disclosures in an effort to identify any trends, important comparisons, or unexpected results. For the period from 1978 to 2018, CEO compensation based on options realized increased 940.3%—between one-fourth and one-third faster than stock market growth (depending on the market index used) and substantially faster than the painfully slow 11.9% growth in the typical worker’s compensation over the same period. This method corrects for the fact that full-year samples show higher average CEO compensation than samples for the first half of a year. Mishel, Lawrence. In contrast, the typical workers in these large firms saw their annual compensation grow by just 5.3% over the recovery and actually fall by 0.2% between 2017 and 2018. Economic Policy Institute, February 2019. The new CEO-to-worker compensation ratios contained in proxies in 2018 and in 2019 shine a ray of sunlight onto the compensation of the typical worker. In this interpretation, CEO compensation is being set by the market for “skills” or “talent,” not by managerial power or rent-seeking behavior.10 This explanation lies in contrast to that offered by Bebchuk and Fried (2004) or Clifford (2017), who claim that the long-term increase in CEO pay is a result of managerial power. Relative to others in the top 1%, households headed by nonfinance executives had roughly average income growth; those headed by someone in the financial sector had above-average income growth; and the remaining households (nonexecutive, nonfinance) had slower-than-average income growth. Analyses of the underlying components of CEO compensation over the 2016–2018 period in Table 1 showed a strong growth in stock awards, which are simply stocks granted to employees. He is the co-author of all 12 editions of The State of Working America. Newsroom 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. 2013. 2017. Stock awards now make up about half of all CEO compensation. CEO: Margaret H. Georgiadis CEO pay: $31,275,289 (2017) Median worker pay: $6,271 CEO/median worker pay ratio: 4,987:1 If you ever played with a Barbie or rode on a Power Wheels when you were a kid, you know the Mattel corporation.If you can't imagine a Mattel employee getting by in America on a little more than $6,000 a year, don't worry, most of them don't have 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. These trends confirm that there has been a reduction in stock options granted in recent years and not just an accumulating inventory of unexercised options. 123), which required the expensing of options (FASB 2004).8 In contrast to the early 2000s trend, the decline in the role of stock options in the aftermath of the financial crisis of 2008–2009 suggests that firms have shifted composition away from options and toward stock awards: The average decline in the value of stock options in compensation was accompanied by a continued decline in the number of unexercised stock options, from an average of 1,519 in 2007 to just 561 in 2018, and a substantial 31% fall in the inflation-adjusted value of unexercised stock options over the 2016–2018 period to a level just half that of the 2006–2007 period. * Average annual compensation of the workers in the key industries of the firms in the sample. How do taxes and spending work, and where do you fit in? The SEC allows firms flexibility in how they construct the CEO-to-median worker pay comparison; this means there is not comparability across firms—and ratios may not even be comparable from year to year for any given firm, if the firm changes the metrics it uses. Using the value-of-options-granted measure reveals a 9.9% increase, from $12.7 million in 2017 to $14.0 million in 2018. The data have now been corrected by ExecuComp. Securities and Exchange Commission (SEC). Kaplan (2012a, 4) concludes that CEO relative pay “has remained relatively constant or declined.” He finds that the ratio “remains above its historical average and the level in the mid-1980s” (2012b, 14). It is possible that a “secondary earner,” or spouse, has income as an executive or in finance. Two measures are computed, differing in the treatment of stock options: One uses “options realized,” and the other uses the value of “options granted.” Both series also include salary, bonus, restricted stock awards, and long-term incentive payouts for CEOs. We update Kaplan’s series beyond 2010 using the growth of CEO compensation (based on options exercised) in our own series. Without such information, or simply the annual hours worked by the median worker, it is not possible to standardize the compensation for comparisons across firms. This options-realized measure, shown in column (7), reflects the value of options exercised that CEOs report on their W-2 form and represents what they actually earned in a given year from exercising those options. Jobs at EPI We also look at the relationship between CEO pay and the stock market. This measure is not influenced by the timing of CEO decisions to cash or not cash in their options. 2010. See related work on Economic inequality, Wages, and CEO Pay. Various years. The report’s main findings include the following: This section provides detailed analysis of our findings. “Methodology for Measuring CEO Compensation and the Ratio of CEO-to-Worker Compensation, 2012 Data Update.” Economic Policy Institute Working Paper no. Amid a healthy recovery on Wall Street following the Great Recession, CEOs enjoyed outsized income gains even relative to other very-high-wage earners (those in the top 0.1%); CEOs of large firms earned 5.4 times that of the average top 0.1% earner in 2017, up from 4.4 times in 2007. Although the CEO-to-worker compensation ratio remains below the value achieved in 2000, at the peak of the stock market bubble, it is far higher than it was in the 1960s, 1970s, 1980s, and 1990s. Kaplan, Steven N. 2012b. Moreover, as we discuss, the appropriate comparison is to other earners, not to households, which could have multiple earners and shifts in the number of earners over time. “Defending the One Percent.” Journal of Economic Perspectives 27, no. It is important to understand that (as we describe later in this report) we do not create the ratio from the averages; rather we construct a ratio for each firm and then average the ratios across firms. Sec metric solely focuses on wages. https: //www.irs.gov/statistics/soi-tax-stats-historical-table-12 ( web page last updated December 13, 2018.. 386-To-1, even higher than the ratio with the nonprofit Professional Employees Union constructed as described in the stock rather!? ” national Bureau of Economic research, insightful graphics, and Jae Song higher average was... Chose which years to present in the specific firm, Emmanuel Saez, and Heidi Shierholz s & P index. ( described in the specific firm ratios in samples and not the ratio of of. 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