CEO pay in last four decades grew 940.3% while average worker up 11.9%

CEO pay in the past four decades has grown 940.3% while the pay of an average worker increased 11.9% over the same time period.

That is what the Economic Policy Institute, a nonprofit think tank based in Washington, D.C., that focuses on the low- and middle-income Americans, found in a study released last week.

The study’s authors tracked CEO pay beginning in 1978. They found compensation took off in the 1990s, peaked in 2000 and has fluctuated since, most notably around the burst of the dot-com bubble in the early 2000s and around the recession of 2008 and 2009.

Still, the study found growth in CEO pay since 1978 far exceeds that of private-sector workers, and its authors offered some suggestions on how to limit executive-pay growth.

“In our view, the CEO compensation and escalation is not reflective of some big gaining of skills or improved contribution to their firm’s performance or the economy,” said co-author Lawrence Mishel, a distinguished fellow with the Economic Policy Institute. “That means we could tax away half of what they take in, and I think the economy would be the same size.”

Since stock options make up the bulk of CEO pay at large companies, the study looked at two ways to measure options. One includes stock options realized and the other the value of stock options granted. Under either methodology, CEO pay gains far outpaced those of average workers.

Total pay includes salary, bonuses, stock awards and long-term incentive payouts.

The report found that CEO pay at the 350 largest public companies from 1978 to 2018 has grown more than 1,000%, or 940.3% when exercised options are counted.

That’s far above the performance of the S&P 500, a good proxy for the overall stock market, which grew 706.7% during that time. In 2018, average CEO pay was $17.2 million, down 0.5% from the previous year.

The typical worker’s wages grew 11.9% from 1978 to 2018, from $50,300 to $56,200. The difference between the largest company CEOs and the typical worker underscores growing income inequality in the United States, the study said.

The report also highlights that as CEO pay increases, so does that of the very top workers, which the study said is another contributor to growing income inequality.

“CEOs of large firms are setting the pattern for this very large group of people at the very top, and growth of CEO compensation has helped drive up the pay of the top 1% and 0.1% of all workers,” Mishel said.

The inflation-adjusted pay of the top 0.1% grew 339.2% from 1978 to 2017, according to findings in the report.

The Star Tribune has measured CEO pay at Minnesota public companies for 28 years, including the value of exercised stock options. The 20 largest Minnesota-based public companies are comparable in size to the 350 largest public companies in the EPI study.

The median compensation of the 20 highest-compensated Minnesota CEOs in 2018 was $13.9 million, down 17% from the year before but up 149% in the past 10 years when the median compensation of the top 20 Minnesota CEOs was $5.6 million.

The EPI study noted that CEO total compensation when including exercised stock options fluctuates along with the stock market since CEOs are more likely to exercise options under more advantageous market conditions.

Authors of the EPI study noted that CEO pay has outpaced the growth of the stock market and even the pay of other high-wage earners. “This is yet another indicator that CEO pay is more likely based on CEOs’ power to set their own pay, not on a market for talent,” they said in the report.

The EPI solutions to fix the problems of high CEO pay and income inequality include policies that would reinstate higher marginal income tax rates, higher corporate tax rates for companies with higher CEO-to-worker compensation ratios or luxury taxes on amounts higher than a set cap.

“The economy would suffer no harm if CEOs were paid less (or taxed more),” the study concluded.