What this report finds: This report looks at trends in CEO compensation using two measures of compensation. The first measure includes stock options realized (in addition to salary, bonuses, restricted stock grants, and long-term incentive payouts). By this measure, in 2016 CEOs in America’s largest firms made an average of $15.6 million in compensation, or 271 times the annual average pay of the typical worker. While the 2016 CEO-to-worker compensation ratio of 271-to-1 is down from 299-to-1 in 2014 and 286-to-1 in 2015, it is still light years beyond the 20-to-1 ratio in 1965 and the 59-to-1 ratio in 1989. The average CEO in a large firm now earns 5.33 times the annual earnings of the average very-high-wage earner (earner in the top 0.1 percent).
Because the decision to realize, or cash in, stock options tends to fluctuate with current and potential stock market trends (since people tend to cash in their stock options when it’s most advantageous for them to do so), we also look at another measure of CEO compensation to get a more complete picture of trends in CEO compensation. This measure tracks the value of stock options granted, reflecting the value of the options at the time they are granted. By this measure, CEO compensation rose to $13.0 million in 2016, up from $12.5 million in 2015.
By either measure CEO compensation is very high relative to the compensation of a typical worker or even that of an earner in the top 0.1 percent, and it has grown far faster than stock prices or corporate profits. The explanation for the falloff in CEO compensation associated with realized stock options is unclear: neither stock prices nor an accumulation of unexercised options provide an explanation. It will be interesting to see if this trend continues.
Why it matters: Regardless of how it’s measured, CEO pay continues to be very, very high and has grown far faster in recent decades than typical worker pay. Exorbitant CEO pay means that the fruits of economic growth are not going to ordinary workers, since the higher CEO pay does not reflect correspondingly higher output. CEO compensation has risen by 807 or 937 percent (depending on how it is measured—using stock options granted or stock options realized, respectively) from 1978 to 2016. At 937 percent, that rise is more than 70 percent faster than the rise in the stock market; both measures are substantially greater than the painfully slow 11.2 percent growth in a typical worker’s annual compensation over the same period.
How we can solve the problem: Over the last several decades CEO pay has grown a lot faster than profits, than the pay of the top 0.1 percent of wage earners, and than the wages of college graduates. This means that CEOs are getting more because of their power to set pay, not because they are more productive or have special talent or have more education. If CEOs earned less or were taxed more, there would be no adverse impact on output or employment. Policy solutions that would limit and reduce incentives for CEOs to extract economic concessions without hurting the economy include:
- Reinstate higher marginal income tax rates at the very top.
- Remove the tax break for executive performance pay.
- Set corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation.
- Allow greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.