CEO pay down — to ‘only’ 271 times that of the typical worker

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking (UNITED STATES BUSINESS) - RTXQCTH

The CEOs of the top 350 U.S. firms made an average of $15.6 million in 2016, according to a new report, released recently by the left-leaning Economic Policy Institute. Photo by Rick Wilking/Reuters

The CEOs of the top 350 U.S. firms made an average of $15.6 million in 2016. That’s according to a new report, released recently by the left-leaning Economic Policy Institute that looks at total CEO compensation: salary, stock grants, bonuses and long-term incentive payouts.

Among the findings: The average CEO makes 271 times the amount that a typical worker makes — the “average” pay of a worker in the CEO’s industry. Notably, that’s down from 2015, when CEO-to-worker compensation was 286 to 1. But it’s a far cry from the 20-to-1 ratio of 1965 and suggests just how unequal corporate pay in America has come.

So why are CEOs making so much? Do they deserve it? And why might CEO pay have been down last year?

We spoke to EPI’s president Lawrence Mishel about the study and its findings.

KRISTEN DOERER: What were the major findings of the report?

LARRY MISHEL: We found that CEO pay remains tremendously high compared to what it was in 1995, 1989 or the 1960s. Executive pay since 1978 has risen 70 percent faster than the stock market, much faster than even the wages for the top 0.1 percent of earners. A typical worker has only seen their annual compensation grow by around 11 percent over that time period. While for CEOs it’s up 800 to 900 percent [since 1978].

Compensation of CEOs in large firms [counting the stock options they sell] is now 271 times that of a typical worker, But what really is important to know is that back in 1965, a CEO would earn only roughly 20 times that of a typical worker.

KRISTEN DOERER: Were you surprised by the findings?

LARRY MISHEL: I was a little surprised that CEO compensation fell when we measured pay with the amount of stock options that were realized or sold. And that was for the second year. But it only fell really for the highest paid CEOs. The bottom 80 percent of CEOs saw their compensation rise from 2015 to 2016 and over the years. So apparently the highest-paid CEOs are not getting as many stock options as they used to and not selling as many as they used to.

READ MORE: Large CEO-worker wage gaps are a major consumer turnoff

KRISTEN DOERER: Why do you think CEO pay is down, if only a little?

LARRY MISHEL: So CEO compensation tends to rise and fall with the stock market, because when the stock market goes up, CEOs will sell more of their stock options. That actually didn’t happen this year. My instinct is that CEO compensation will resume its rise, as stock prices continue upwards. So we’ll have to wait until 2017 to see whether, if there’s a further rise in the market, we’ll see CEO compensation perk up again. I wouldn’t be surprised. Is it encouraging the ratio has gone down? Yes and no. Until we understand what caused the decline of stock options realized, it’s hard to judge what is happening and what it means. I’m happier than if the ratio zoomed higher, for sure. Also, I think CEOs are being granted fewer stock options now than let’s say in the 2002 to 2007 period. And they’re also cashing out less. The ups and downs of the stock market will determine how many stock options people exercise and sell.

KRISTEN DOERER: If a company’s productivity and profits increase, then doesn’t that company’s CEO deserve more pay?

LARRY MISHEL: Absolutely. But CEO compensation tends to go up with the stock market. So when the stock market is rising generally, the stocks of the firms in every industry will tend to go up. That does not suggest that all those CEOs are doing a bang-up job. That just means they’re riding a wave of the overall stock market going up.

CEO compensation is not set so that when a particular firm’s price rises more than the stock price of its competitors, it goes up. It’s just whether the stock price itself goes up. And there’s lots of evidence that company performance is not very tightly linked to what CEOs are paid.

KRISTEN DOERER: To follow along that, the study says that “CEO pay does not reflect great productivity of the executives but rather the power of CEOs to extract concessions.” Can you explain that?

LARRY MISHEL: There’s very little evidence that CEO compensation has grown so much because the firms themselves have done that much better. CEO compensation has far outpaced corporate profits and stock prices. What explains CEO compensation going up is a sort of Lake Wobegon world — everyone is above average, and the directors of every firm want to pay their CEO more than other people. And so CEO pay tends to get ratcheted up. [See Paul Solman’s explanation of the Lake Wobegon effect in his PBS NewsHour story.]
So in my view, we could cut CEO compensation in half. CEOs would all still show up to work. And the economy would be equally as productive as it is now. So what CEOs are getting is money that otherwise would go to other people.

READ MORE: An explanation for the rise in CEO pay? Stable option grants

KRISTEN DOERER: So what do we do about all this?

LARRY MISHEL: One is transparency. It’s important to be able to know what the compensation is. It’s useful to know what the compensation is relative to that of a typical worker in the firm. There ought to be more chances for shareholders to have a say on what the CEO compensation is.

I think we should not allow performance pay or the stock options that CEOs get to be tax-deductible. Right now a firm can pay its CEO $1 million in wages, and all the wages above that are not tax-deductible, but they can provide $10 million of stock options, and it’s all tax-deductible. And I think that’s basically a loophole.

KRISTEN DOERER: Don’t we have some transparency with CEO pay?

LARRY MISHEL: Well, we have transparency with CEO pay for those companies that sell stock publicly and are on the public exchanges. And we have a new requirement from Dodd-Frank that will happen next year, where companies have to reveal the pay of their CEOs as a ratio to the pay of the median or typical worker in the firm.

KRISTEN DOERER: In the report, you also touch upon some of the criticism that has come from more conservative think tanks. Can you talk a little bit about that?

LARRY MISHEL: The main justification that some offer for the very high CEO compensation is that firms are competing in a market for talent. They have to pay that to get the kind of people they want. We examined what happened to CEO compensation and compared it to the wages of the top 1,000th of workers, the top 0.1 percent. And the pay of CEOs has risen three times as fast as that of other high-wage earners. It’s hard to believe that CEOs over the last 30, 40 years have become that much more talented than other people in the top 0.1 percent.

READ MORE: Column: We don’t need Washington to fix bloated CEO pay

KRISTEN DOERER: Mark Perry, an economist at the conservative American Enterprise Institute, has said that we should be looking at the compensation of average CEOs — not of just the top 350 companies.

LARRY MISHEL: The reason not to look at an average CEO, including CEOs of very small firms, is that they don’t set the standard. The pay of the large companies’ CEOs sets the pay level for lots of executives and managers in those firms. Private-sector firms are going to copy that. It turns out that nonprofits in universities and hospitals have the pay of their CEOs affected by that too.

So that’s what really matters. Most companies, most firms don’t even really have CEOs. A company of 10 to 20 people doesn’t have someone you call a CEO. They may have a president of a company or the manager, but they in no way are any bit like someone who has hundreds of millions in revenue.