The Advisors' Blog

Last week, the Economic Policy Institute published an annual report on CEO pay – which shows that when it comes to total compensation, public company CEOs are leaving the rest of us in the dust, especially rank & file employees. As I’ve written before, most of this is because of equity awards (which are in theory designed to motivate executives to achieve strategic goals and don’t hit cash flows).

The researchers for this particular report used a “realized pay” measure that counts stock awards when vested and stock options when exercised, but the numbers would’ve been high if they looked at grant date fair value, too. They also excluded Elon Musk’s compensation as an outlier. Here are the key findings:

– Growth of CEO compensation (1978–2021). Using the realized compensation measure, compensation of the top CEOs increased 1,460.2% from 1978 to 2021 (adjusting for inflation). Top CEO compensation grew roughly 37% faster than stock market growth during this period and far eclipsed the slow 18.1% growth in a typical worker’s annual compensation. CEO granted compensation rose 1,050.2% from 1978 to 2021.

– Growth of CEO compensation during the pandemic (2019–2021). The dramatic increase in CEO compensation during the pandemic is remarkable. While millions lost jobs in the first year of the pandemic and suffered real wage declines due to inflation in the second year, CEOs’ realized compensation jumped 30.3% between 2019 and 2021. Typical worker compensation among those who remained employed rose 3.9% over the same time span.

– Changes in the CEO-to-worker compensation ratio (1965–2021). Using the realized compensation measure, the CEO-to-worker compensation ratio reached 399-to-1 in 2021, a new high. Before the pandemic, its previous peak was the 372-to-1 ratio in 2000. Both of these numbers stand in stark contrast to the 20-to-1 ratio in 1965. Most importantly, over the last two decades the ratio has been far higher than at any point in the 1960s, 1970s, 1980s, or early 1990s. Using the CEO granted compensation measure, the CEO-to-worker compensation ratio rose to 236-to-1 in 2021, significantly lower than its peak of 393-to-1 in 2000 but still many times higher than the 44-to-1 ratio of 1989 or the 15-to-1 ratio of 1965.

– Changes in the composition of CEO compensation. The composition of CEO compensation is shifting away from the use of stock options and toward the use of stock awards. Vested stock awards and exercised stock options averaged $21.9 million in 2021 and accounted for 80.1% of the average realized CEO compensation.

– Changes in the CEO-to-top-0.1% compensation ratio. Over the last three decades, compensation grew far faster for CEOs than it did for other very highly paid workers (the top 0.1%, or those earning more than 99.9% of wage earners). CEO compensation in 2020 (the latest year for which data on top wage earners are available) was 6.88 times as high as wages of the top 0.1% of wage earners, a ratio 3.7 points greater than the 3.18-to-1 average CEO-to-top-0.1% ratio over the 1947–1979 period.

– Implications of the growth of CEO-to-top-0.1% compensation ratio. The fact that CEO compensation has grown far faster than the pay of the top 0.1% of wage earners indicates that CEO compensation growth does not simply reflect a competitive race for skills (the “market for talent”) that also increases the value of highly paid professionals more generally. Rather, the growing pay differential between CEOs and top 0.1% earners suggests the growth of substantial economic rents (income not related to a corresponding growth of productivity) in CEO compensation. CEO compensation, it appears, does not reflect the greater productivity of executives but the specific power of CEOs to extract concessions — a power that stems from dysfunctional systems of corporate governance in the United States. Because so much of CEOs’ income constitutes economic rent, there would be no adverse impact on the economy’s output or on employment if CEOs earned less or were taxed more.

Look, I very much support responsible pay and minimizing wage inequality. But I’m not completely sold on the implication that companies should use these particular conclusions as a basis to rein in CEO pay. That’s because other “highly paid professionals” may not be part of the specific CEO labor market that companies are trying to draw from for the top leadership spot, and boards seem to think that a high-performing CEO can make a real difference in company performance for shareholders and other stakeholders.

Unfortunately, when it comes to responsible pay practices, reports like this seem to contribute more to the trend of “shouting past each other” than they do of making a real difference, at least from the perspective of structuring executive pay. Yet, if the purpose of this report is to create an “outrage tool” that will lead to public policy and tax changes, maybe it’s doing the job – because the numbers are pretty eye-popping. The report recommends several policy changes that get proposed from time to time:

We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so. Such policies could include 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 compensation; using antitrust enforcement and regulation to restrain the excessive market power of firms—and by extension of CEOs; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

Companies that are able to keep pay ratio in check will be less at risk of significant adjustments or consequences if any of these changes come to pass – and have the added benefit of being considered responsible corporate citizens, with one less point that can be weaponized in a proxy contest. Visit our “Pay Ratio” Practice Area for more on this topic – including guidance on “pay ratio” taxes at the state level.

– Liz Dunshee