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Since 1978, CEO compensation up 940%; workers 12%

August 20, 2019

Topics: Quote of the Day

By Lawrence Mishel and Julia Wolfe
Economic Policy Institute, August 14, 2019

What this report finds: The increased focus on growing inequality has led to an increased focus on CEO pay. Corporate boards running America’s largest public firms are giving top executives outsize compensation packages. Average pay of CEOs at the top 350 firms in 2018 was $17.2 million—or $14.0 million using a more conservative measure. (Stock options make up a big part of CEO pay packages, and the conservative measure values the options when granted, versus when cashed in, or “realized.”) CEO compensation is very high relative to typical worker compensation (by a ratio of 278-to-1 or 221-to-1). In contrast, the CEO-to-typical-worker compensation ratio (options realized) was 20-to-1 in 1965 and 58-to-1 in 1989. CEOs are even making a lot more—about five times as much—as other earners in the top 0.1%. From 1978 to 2018, CEO compensation grew by 1,007.5% (940.3% under the options-realized measure), far outstripping S&P stock market growth (706.7%) and the wage growth of very high earners (339.2%). In contrast, wages for the typical worker grew by just 11.9%.

Why it matters: Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. CEOs are getting more because of their power to set pay, not because they are increasing productivity or possess specific, high-demand skills. This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or taxed more).

From the Conclusion

Some observers argue that exorbitant CEO compensation is merely a symbolic issue, with no consequences for the vast majority of workers. However, the escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, generating widespread inequality.

High CEO pay reflects economic rents—concessions CEOs can draw from the economy not by virtue of their contribution to economic output but by virtue of their position. Clifford (2017) describes the Lake Wobegon world of setting CEO compensation that fuels its growth: Every firm wants to believe its CEO is above average and therefore needs to be correspondingly remunerated. But, in fact, CEO compensation could be reduced across the board and the economy would not suffer any loss of output.

Another implication of rising pay for CEOs and other executives is that it reflects income that otherwise would have accrued to others: What these executives earned was not available for broader-based wage growth for other workers. (Bivens and Mishel 2013 explore this issue in depth.) It is useful, in this context, to note that wage growth for the bottom 90% would have been nearly twice as fast over the 1979–2017 period had wage inequality not grown. Most of the rise of inequality took the form of redistributing wages from the bottom 90% (whose share of wages fell from 69.8% to 60.9%) to the top 1.0% (whose wage share nearly doubled, rising from 7.3% to 13.4%).



By Don McCanne, M.D.

There has been much written about the growth in income and wealth inequality and the injustices that result therefrom. As one important contributor, this study shows that CEO compensation is obscene, but does that really matter, and, if so, what should we do about it?

Some say that we should not begrudge those with very high incomes and wealth, but the problem is that, as this and many other studies have shown us, their high compensation “reflects income that otherwise would have accrued to others.”

The greatest concern that most people have regarding health care is its affordability. At 18% of our GDP, the majority cannot afford to pay their proportionate share into a pool of funds that would comprise our national health expenditures.

It becomes immediately obvious that an important step towards making health care affordable for all of us would be to recover some of the excess income from the very wealthy that should be accruing to others and place that in a universal risk pool for health care. Taxes function not only as a source of public revenues, but they also serve to make income and wealth more equitable (not necessarily equal, but fair).

There are certainly other policies that can be established to inject more fairness into our economy, but establishing an equitable Single Payer Medicare for All that’s affordable for each of us would be a giant first step toward rectifying the injustices of income and wealth inequality, while providing us all with the great benefit of access to health care nirvana.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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