Capability Building See related work on Economic inequality, Wages, CEO Pay, and Employer power and monopsony. The economy would suffer no harm if CEOs were paid less (or were taxed more). This is a marketwide phenomenon, not one of improved performance of individual firms: Most CEO pay packages allow pay to rise whenever the firm’s stock value rises; that is, they permit CEOs to cash out stock options regardless of whether the rise in the firm’s stock value was exceptional relative to comparable firms in the same industry. We therefore have incorporated a realized measure of stock awards along with the realized measure of stock options in our realized compensation metric. In addition, these companies are required to provide the ratio of CEO-to-worker compensation (SEC 2015). We do not have data that would permit an assessment of the bias in 1979 or 1989. 2019. On average, a CEO at a smaller nonprofit ($500K – $1M in annual expenses) makes $85,593 each year, while the average for a CEO at large nonprofits (over $50 million in annual expenses per year) gets paid $332,089. Stock awards can increase or decrease in value depending on the trend in the firm’s stock price. Appendix Figure A shows the trend in the fair market value of stock awards when granted and the vested value of stock awards that is now incorporated into our realized pay CEO compensation metric, both set in 2019 dollars. Anthem, Inc. annual reports of executive compensation and pay are most commonly found in the Def 14a documents. Realized CEO compensation in 2019 remained below its stock market bubble 2000 peak, but was only off the peak by $627,000, or 2.9%. Although the stock market fell by roughly half between 1965 and 1978, realized CEO compensation increased by 78.9%. Several policy options could reverse the trend of excessive executive pay and broaden wage growth. Various years. Compensation committees benchmark CEO pay against a self-selected peer group -- often 12 to 20 companies that may be of similar size and complexity, and … 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. Ithaca, N.Y.: Cornell Univ. 2018. This creates a bias in comparing data for the first half of the year relative to the full year’s data in the prior or earlier years: Compensation levels for the full year’s data are higher than compensation in the data limited to the first half. Board of Directors “The New Pay Gap: What Firms Report Paying CEOs Versus What They Take Home.” Wall Street Journal, August 25, 2019. Realized CEO compensation fell again during the financial crash of 2008–2009 and rose strongly after 2009 and with the strong growth in 2019 regained and exceeded its 2007 pre-financial crisis level but in 2019 still remained below the 2000 peak level. 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. Washington, D.C.: WorldatWork Press. Live Events 2012. Various years. An Examination of Pay Ratios Revealed by Dodd-Frank. “Typical worker” compensation is the average annual compensation (wages and benefits of a full-time, full-year worker) of production/nonsupervisory workers in the industries that the top 350 firms operate in. CEO compensation has grown a great deal since 1965, but so has the pay of other high-wage earners. Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real 2015. Historically, constructing a firm-specific CEO-to-worker pay ratio was impossible without the cooperation of the firm, although sector-specific estimates were possible (see Mishel and Schieder 2018). CEO realized compensation was 6.04 times the pay of the top 0.1% of wage earners in 2018, a bit below the 6.10 ratio in 2017 and substantially higher than the 4.36 ratio in 2007. 2013. Kaplan, Steven N. 2012a. If stock awards have a lengthy vesting period, say three to five years, then the CEO has an interest in lifting the firm’s stock price over that period while being mindful to avoid any implosion in the stock price—to maintain the value of what they have. Survey details . Equity Services, Quick Reads 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. Although the analyses in this report predate the economic shock of the coronavirus pandemic, there is a renewed focus on CEO pay because so many American workers are out of work or have seen their hours or wages cut. It allows us to avoid artificially lowering the estimated change in CEO compensation in 2019 relative to last year and earlier years.5. They are less consistent with managerial power. Mishel, Lawrence, and Julia Wolfe. A stock award has the value when given, or vested, and can increase or decrease in value as the firm’s stock price changes. The inflation-adjusted annual earnings of the top 0.1% grew 337% from 1978 to 2018 (Mishel and Kassa 2019). Many view the high level of CEO compensation as the result of powerful managers setting their own pay. It recovered to 217-to-1 by 2014 and, after dipping a bit over the next three years, ended back up at 212-to-1 in 2018 before rising to 223-to-1 with the strong 8.6% growth of CEO granted compensation in 2019. Bebchuk, Lucian, and Jesse Fried. The need for this change in measurement was described in last year’s report on CEO compensation (Mishel and Wolfe 2019). The measure of stock awards used in both of our CEO compensation metrics was the fair value of stock awards: the number of shares granted times the stock price at the grant date. Given the limitations of the metrics used for SEC reporting, the SEC compensation data do not supplant the need for our annual CEO compensation series. Revising the measurement of CEO compensation to include the realized value of stock awards increases the level of CEO compensation in the latest full year, 2018, and also shows greater growth since 2006. The CEO-to-worker pay ratio peaked in 2000, at 386-to-1, even higher than the ratio with the realized compensation measure. Some involve taxes. “Executive Compensation: A New View from a Long-Term Perspective, 1936–2005.” Review of Financial Studies 23, no. Media reports use proxy filings, which reflect the previous year’s compensation decisions rather than what is current at the time of publication. Disney's Robert Iger highest-paid CEO making over $65 million in 2018, while Amazon CEO Jeff Bezos made the least (a paltry $1.6 million). 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; establishing a luxury tax on compensation such that for every dollar in compensation over a set cap, a firm must pay a dollar in taxes; reforming corporate governance to give other stakeholders better tools to exercise countervailing power against CEOs’ pay demands; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation. 296, June 2013. Using a different “granted” measure of CEO pay, average top CEO compensation was $14.5 million in 2019. Each year’s sample includes the largest 350 firms for which ExecuComp provides data. 2019. Kaplan (2012b, 14) notes that the Frydman and Saks series grew 289% whereas the Hall and Liebman series grew 209%. 10. Required form 'RadfordSubscribe' does not exist. If we were able to remove top CEOs’ pay from the top 0.1% category, it would reduce the average for the broader group.12. 1: 91–128. Press. The stock market decline during the financial crisis drove the ratio down to 178-to-1 in 2009. By industry, major increases are seen in manufacturing, FMCG followed by all financial industries. TCM participants can get access to the 2019 data starting July 31, but will need to submit data in order to get access. We then multiply the share of vested stock awards by the projected full-year 2019 CEO realized compensation. Accounting, Corporate Governance. According to Bivens and Mishel, CEO pay gains are not the result of a competitive market for talent but rather reflect the power of CEOs to extract concessions. Source: Authors’ analysis of data from Compustat’s ExecuComp database, the Bureau of Labor Statistics’ Current Employment Statistics data series, and the Bureau of Economic Analysis NIPA tables. Why it matters: Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. After the CEO, the most highly compensated senior executive position was the President, with a median total compensation package of $262,000, followed by the senior operations executive (COO), with a median total compensation package of $223,500. “Top 1.0 Percent Reaches Highest Wages Ever—Up 157 Percent Since 1979,” Working Economics Blog, Economic Policy Institute, October 18, 2018. Various years. Source: Authors’ analysis of EPI State of Working America Data Library data on top 0.1% wages in Mishel and Kassa 2019 and data on CEO compensation from an extrapolation of Kaplan’s (2012b) CEO compensation series. This assumption also likely makes our ratio a more conservative estimate of the true ratio than the ratios reported to the SEC. The increase in performance-based pay continued this year, despite concerns about a potential reversal. 49, October 12, 2016. The compensation policy and programs are designed to reward performance, sustainable growth and long-term shareholder value creation, while offering competitive remuneration to be able to attract and retain highly qualified employees. Leadership Team First, because of limitations in data availability, the measure of worker compensation in our ratios reflects workers in a firm’s key industry, not workers actually working for the firm. To ensure pay trends are timely and accurate, Aon’s annual Total Compensation Measurement (TCM) survey of executive compensation, which will be released on July 31st, captures current CEO pay — that is, 2019 salaries, target bonus opportunities and long-term incentive awards. The CEOs examined in this report head large firms. Mishel, Lawrence, Josh Bivens, Elise Gould, and Heidi Shierholz. There is a simple logic behind companies’ decisions to shift from stock options to stock awards, as Clifford (2017) explains. In 2019, the ratio of CEO-to-typical-worker compensation was 320-to-1 under the realized measure of CEO pay; that is up from 293-to-1 in 2018 and a big increase from 21-to-1 in 1965 and 61-to-1 in 1989. This paper surveys the recent literature on CEO compensation. CEO compensation grew far faster than that of the top 0.1% of earners over the recovery from 2009 to 2018, as the ratio spiked from 4.61 to 6.04. Vested stock awards (the realized metric, column 6) alone were nearly half (47.7%) of all CEO compensation in 2019. This first metric can be compared with the second metric, compensation granted, whose measurement is the same as in prior reports. The stock market decline during the 2008 financial crisis also sent CEO compensation tumbling, as it had in the early 2000s. Lawrence Mishel is a distinguished fellow and former president of the Economic Policy Institute. Second, our worker compensation series reflects annualized compensation (multiplying an estimate of hourly compensation by 2,080 hours), eliminating the ambiguity that arises when weeks worked and hours per week are not specified or when they differ across firms (as can be the case for the SEC ratios). However, granted CEO compensation remained down, at $14.4 million in 2007, a substantial $7.6 million fall from the 2000 level. We also lack information on the number and wages of executives in privately held firms; to the extent that their CEO compensation exceeds that of publicly traded firms, their inclusion would indicate an even larger bias. Predictive Analytics The 1,167% growth in realized CEO compensation from 1978 (there are no data for 1979) to 2019 far exceeded the growth in productivity, profits, or stock market values in that period. 1225 Eye St. NW, Suite 600 In … He holds a Ph.D. in economics from the University of Wisconsin at Madison. By contrast, the top-paid bank CEO was Wells Fargo & Co.’s Charlie Scharf, whose 2019 package was worth $55.2 million by the end of the year, according to … DATA Workforce Planning In stark contrast to both the stock market and CEO compensation, private-sector worker compensation increased just 0.6% over the same period. To some analysts, this suggests that the dramatic rise in CEO compensation has been driven largely by the demand for the skills of CEOs and other highly paid professionals. 1 of Nestlé’s Articles of Association, the General Meeting shall approve annually the proposal of the Board of Directors in relation to the maximum 2013. 1. There were 38,824 executives in publicly held firms and 9,692 people in the top 0.1% of wage earners in 2007, according to the Capital IQ database (tabulations provided by Temple University professor Steve Balsam). For comparison, Table 2 also presents the average annual compensation (wages and benefits of a full-time, full-year worker) of private-sector production/nonsupervisory workers (a group covering more than 80% of payroll employment, see Gould 2020a), allowing us to compare CEO compensation with that of a typical worker. When the stock market bubble burst in the early 2000s there was a substantial paring back of CEO compensation. Again, if one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why these professional groups have had a similar or even higher growth in pay. Bivens, Josh, and Lawrence Mishel 2015. 2019. These two stock-related items—stock options and stock awards—together still make up the bulk of CEO compensation, at 74% and 68%, respectively, of options-exercised and options-granted CEO compensation measures in 2018…. To learn more about year-over-year pay trends and how to participate in the TCM Survey, please contact us now. By 2018, however, the revised CEO compensation measure is $18,663,000, $1,214,000, or 7.0%, greater than the unrevised measure, $17,448,000. They also earn far more than the typical worker, and their pay has grown much more rapidly. 16. The reason is this: The exact compensation earned through stock options is measurable—the exercised-options measure of compensation captures any rise in the stock price from the time the options are granted. Clifford (2017) recommends setting a cap on compensation and taxing companies on any amount over the cap, similar to the way baseball team payrolls are taxed when salaries exceed a cap. Source: Authors’ analysis of data from Compustat’s ExecuComp database, the Federal Reserve Economic Data (FRED) database from the Federal Reserve Bank of St. Louis, the Bureau of Labor Statistics’ Current Employment Statistics data series, and the Bureau of Economic Analysis NIPA tables. They also earn far more than the typical worker, and their pay—which relies heavily on stock-related compensation— has grown much more rapidly than typical worker pay. 2018. Exercised stock options are considered W-2 wages so taxed as “income.” Stock awards are also taxed as income when vested. Newsroom “Are CEOs Really Paid Like Bureaucrats?” National Bureau of Economic Research Working Paper no. 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). These shares may actually understate the role of nonfinance executives and the financial sector, because they do not account for increased spousal income from these sources in those cases where the head of household is not an executive or in finance.15. (The comparisons end in 2018 because 2019 data for top 0.1% wages are not yet available). The realized compensation measure also values stock awards at their value when vested (usually three years after being granted), capturing any change in the stock price as well as additional stock awards provided as part of a performance award. Rewarding or Hoarding? 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. * Average annual compensation of the workers in the key industry of the firms in the sample. A one-point rise in the ratio is the equivalent of the average CEO earning an additional amount equal to that of the average earnings of someone in the top 0.1%. Economic Policy Institute, August 2019. The smaller growth of CEO granted compensation (up $1,765,000) in the same period, 2016–2019, reflects the smaller growth of stock awards granted ($1,861,000) and the failure of stock options granted to grow. Washington, DC 20005 Realized CEO compensation grew strongly throughout the 1980s but exploded in the 1990s. 2013. This first metric can be compared with the second metric, compensation granted, whose measurement is the same as in prior reports. Pichai took over as CEO of … Their compensation measure includes wages and benefits.). 18395, September 2012. The large discrepancy between the pay of CEOs and other very-high-wage earners also casts doubt on the claim that CEOs are being paid these extraordinary amounts because of their special skills and the market for those skills. 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. CEO compensation relative to the wages of the top 0.1% of wage earners in 2018 far exceeded the ratio of 2.63 in 1989, a rise (3.41) equal to the pay of more than three very-high-wage earners.13 The log ratio of CEO relative pay grew 83 log points from 1989 to 2018 with respect to wage earners in the top 0.1%. Overall, cash and equity performance-based compensation now make up approximately 58 percent of total pay, compared to 34 percent in 2019. Corporate Governance Download. The pre-2006 measure is similar conceptually to the fair market value but not exactly the same. Where possible, we chose cyclical peaks (years of low unemployment). Moreover, the data we present here would show even faster growth of CEO relative pay if Kaplan’s historical CEO compensation series (which we use as the basis for the ratios in Table 3) had been built using the Frydman and Saks (2010) series for the 1980–1994 period rather than the Hall and Liebman (1997) data.14. 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 327-to-1. 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. CEO-to-worker pay ratios: The new SEC rule and EPI’s methodology. 1997. Authoritative, up-to-date data on the living standards of American workers. To reach this finding, we use Kaplan’s series on CEO compensation and compare it with the wages of top wage earners (reflecting W-2 annual earnings, which includes the value of exercised stock options and vested stock awards), 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). We therefore have incorporated a realized measure of stock awards along with the realized measure of stock options in our realized compensation metric. Mankiw’s claim that top 1% pay or top executive pay simply corresponds to the rise in the college-to-high-school wage premium is unfounded (Mishel 2013a, 2013b). CEO and Senior Executive Compensation in Private Companies 2019-20 Chief Executive Research surveyed 1,668 companies in April thru June of 2019 about their 2018 fiscal year compensation levels and practices, as well as their expected compensation levels for the remainder of 2019. We adjust the ratio for 2019 to reflect the percentage-point growth between the ratios in the first-half-year samples in 2018 and 2019 and add that growth to the ratio estimated for the full-year sample in 2018 to derive the 2019 ratio consistent with the historical data (this corresponds to how we project CEO compensation for 2019 based on first half data in 2018 and 2019). Copy the code below to embed this chart on your website. As noted earlier, it may seem counterintuitive that the two ratios for 2000 are different from each other when the average CEO compensation is the same. There’s an inherent imbalance of bargaining power between employers and employees. This not only promotes economic efficiency and competition, but might help restrain executive pay as well. In this analysis, we focus on changes in pay for 182 companies that had the same CEO in place for 2018 and 2019. As business priorities shift, there will be an added level of complexity when designing executive compensation policies. Hopkins, Matt, and William Lazonick. 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.2 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). Washington, D.C.: WorldatWork Press. We take this compensation as a proxy for the pay of typical workers in these particular firms and use it to calculate the CEO-to-worker compensation ratio for each firm. Executive Compensation Most Fortune 500 companies release annual financial data in early spring; the data are included in samples limited to the first half of the year. Forty-four percent of the growth of the top 0.1%’s income share and 36% of the top 1%’s income share accrued to households headed by nonfinance executives; another 23% for each group accrued to households headed by financial-sector workers (some portion of which were executives). CEOs are even making a lot more—about six times as much—as other very high earners (wage earners in the top 0.1%). Phone: 202-775-8810 • Source: 2019 NAFCU–BFB Gallagher Executive Compensation and Benefits Survey Return on Assets (ROA) 52% Savings/Checking Growth 22% Loan Growth 47% Charge-offs 20% Membership Growth 43% Member Satisfaction 18% Net Income Growth 38% Loans-to-Share Ratio 17% Net Worth 36% CAMELS Rating 11% Asset Growth 30% Total Income 11% In Current Employment Statistics [public data series]. From 1995 onward, the table also identifies the average annual compensation of production/nonsupervisory workers in each of the industries of the firms included in the sample. The strong growth in CEO compensation in 2019 raised it to $1.9 million above where is was in 2007, before the 2008 financial crisis. However, as shown in Figure A and Table 2, the growth of both realized and granted CEO compensation from 2017 to 2019 closely mirrors the growth of the stock market. May 2020. Employment, Hours, and Earnings—National [database]. In 2018 this ratio was 6.04, 2.86 points higher than the historical average of 3.18 in the 1947–1979 period (a relative gain in wages earned by the equivalent of 2.9 very-high-wage earners). Since 1979, and particularly since 1989, the increase in the logged CEO pay premium relative to other high-wage earners far exceeded the rise in the college-to-high-school wage premium, which is widely and appropriately considered to have had substantial growth: The logged college wage premium grew from 0.46 in 1989 to 0.59 in 2018, a far smaller rise than the logged ratio of CEO-to-top-0.1% earnings, a rise from 0.97 to 1.80. Both include salary, bonus, and long-term incentive payouts, but the “granted” measure includes the value of stock options and stock awards when they were granted, whereas the “realized” measure captures the value of stock-related components that accrues after options or stock awards are granted by including “stock options exercised” and “vested stock awards.” FH=First half. Newsletter Various years. Fourth, our metric includes both wages and benefits, whereas the SEC metric solely focuses on wages. “The Mismeasure of Mammon: Uses and Abuses of Executive Pay Data.” Institute for New Economic Thinking Working Paper no. The Internal Revenue Service Statistics of Income (SOI) Bulletin reports that there were nearly 15,000 corporate tax returns in 2007 of firms with assets exceeding $250 million, indicating that there are many more executives of large firms than just those in publicly held firms (IRS 2019). Tables 6.2C, 6.2D, 6.3C, and 6.3D. Bivens, Josh, and Lawrence Mishel. 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