CEO/Worker Pay Ratios: Some Snapshots

CEO/Worker Pay Ratios: Some Snapshots

Timothy Taylor 15/09/2020 9
CEO/Worker Pay Ratios: Some Snapshots

Each year, US corporations are required to report the pay for their chief executive officers, and also to report the ratio of CEO pay to the pay of the median worker at the company. 

Lawrence Mishel and Jori Kandra report the results for 2019 pay in "CEO compensation surged 14% in 2019 to $21.3 million: CEOs now earn 320 times as much as a typical worker" (Economic Policy Institute, August 18, 2020). 

Back in the 1970s and 1980s, it was common for CEOs to be paid something like 30-60 times the wage of a typical worker. In 2019, the ratio was a multiple of 320. 

CEO/Worker Pay Ratios: Some Snapshots


A result of this shift is that while CEOs used to be paid three times as much as the top 0,1% of the income distribution, now they are paid about six times as much. 

CEO/Worker Pay Ratios: Some Snapshots


What is driving this higher CEO pay ratio? In an immediate sense, the higher pay seems to reflect changes in the stock market. The left-hand margin shows CEO pay; the right-hand margin shows the stock market as measured by the S&P 500 index. 

CEO/Worker Pay Ratios: Some Snapshots

This rise in CEO/worker pay ratios has led to a continually simmering argument about the underlying causes. Does the rise reflect the market for talent, in the sense that that running a company in a world of globalization and technological change has gotten harder, and the rewards for those who do it well are necessarily greater? Or does it reflect a greater ability of CEOs to take advantage of their position in large companies to grab a bigger share of the economic pie? One's answer to this question will turn, at least in part, on whether you think CEOs have played a major role in the rise of the stock market since about 1990, or whether you think they have just been riding along on a stock market that has risen for other reasons. For an example of this dispute from a few years ago in the Journal of Economic Perspectives (where I work as Managing Editor), I recommend: 

Without trying to resolve that dispute here, I'd offer this thought: Notice that pretty much all of the increase in CEO/worker pay ratios happened in the 1990s, and the ratio has been at about the same level since then. Thus, if you think that the market for executive talent was rewarding CEOs appropriately, you need an explanation for why the increase happened all at once in about a decade, without much change since then. If you think the reason is that CEOs are grabbing a bigger share of the pie, you need an explanation for why CEOs became so much more able to do that in the 1990s, but then their ability to grab even-larger shares of the pie seemed to halt at that point. To put it another way, when discussing a change that happened in the 1990s, you need an explanation specific to the 1990s. 

I don't have a complete explanation to offer, but one obvious possible cause was in 1993, when  Congress and the Clinton administration enacted a bill with the goal of holding down the rise in executive pay (visible in the first graph above). Up into the 1980s, most top executives had been paid on via annual salary-plus-a-bonus. However, the new law put a $1 million cap on salaries for top executive, and instead required that other pay be linked to performance--which in practice meant giving stock options to executives. Although this law was intended to hold down executive pay, the was The stock market more-or-less tripled in value from late 1994 to late 1999, and so those who had stock options did very well indeed. My own belief is that combination of events reset the common expectations for what top executives would be paid, and how they would be paid, in a way that is a primary driver of the overall rise in inequality of incomes in recent decades. 

A version of this article first appeared on Conversable Economist. 

 

Share this article

Leave your comments

Post comment as a guest

0
terms and condition.
  • Amy Martin

    The CEOs are overpaid

  • Mustapha Hameed

    Shareholders are willing to fire employees instead of reducing the salary of CEO and board members.

  • Alicia Guthrie

    The gap is widening

  • James Masterman

    I am speechless. Our world is so unfair.

  • Paul Monks

    320 times ! Unbelievable !

  • Richard Hessert

    Surprising facts

  • Ashley Rodriguez

    It will be interesting to see how many directors are furloughed

  • Xavier Lai

    Your all welcome to protest here!!!!

  • Neil Lancaster

    Excellent article

Share this article

Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

Latest Articles

View all
  • Science
  • Technology
  • Companies
  • Environment
  • Global Economy
  • Finance
  • Politics
  • Society