Tuesday, September 22, 2015

CEO Compensation - Staying Ahead of the Sweaty Masses

As most of us are aware, wages for most American workers have barely kept pace with inflation.  In fact, as shown on this graph from FRED, real wages have grown by a miserly 12 percent since the first quarter of 2000:

Using this formula for compounded annual growth rate, over the past 15 years, real wages have grown by a compounded annual rate of only 0.76 percent.  That can only be termed pathetic.

A recent Economic Snapshot by Lawrence Mishel and Alyssa Davis at the Economic Policy Institute compares the rate of CEO pay growth to that of a typical worker back to 1979.  Here is a graph comparing the percentage change in CEO pay (in blue) and typical workers (in green), comparing both to the percentage change in the S&P 500 (in red):

By comparison, you can hardly see any growth in the inflation corrected pay of typical American workers over the past 36 years.  In fact, the average inflation-adjusted pay for an average private sector production and non-supervisory workers (who make up 82 percent of total payroll employment) rose from $48,000 in 1978 to $53,200 in 2014, an increase of only 10.9 percent.  On the other hand, inflation-adjusted CEO compensation rose from $1.5 million in 1978 to $16.3 million in 2014, an increase of 997 percent or nearly 100 times the rate of increase seen by typical workers.  As well, CEO pay nearly doubled the growth level of the stock market which rose 503.4 percent over the 36 year period.

This unequal growth in wages means that an average top CEO (in the nation's 350 largest firms) now makes $303 for every dollar that average workers make.  This is down from a peak of $376.10 in 2000 but up from $195.80 in 2009 and way up from a CEO-to-worker compensation ratio of only 20 to 1 in 1965.  Since the Great Recession ended, CEOs have seen their compensation rise by 54.3 percent whereas this is what has happened to real compensation in the work-a-day world:

If not for the increases in the fourth quarter of 2014 and first quarter of 2015, working Americans would have experienced zero net increase in their wages after inflation for the first five years after the Great Recession officially ended.

In case you cared, here is a bar graph that shows how real CEO compensation grew between 2013 and 2014 by pay fifth (quintile):

CEO pay grew the most in the bottom and second from the bottom quintile. 

Even if we compare CEO compensation to other highly paid workers who are earning more than 99.9 percent of all other wage earners, CEOs come off looking pretty good (from their perspective at least).  CEO compensation in 2013 was 5.84 times greater than the top 0.1 percent of wage earners, 2.66 percentage points higher than the 3.18 average ratio that prevailed between 1947 and 1979.  This suggests that CEO compensation growth does not simply reflect the increased value of highly paid executives (i.e. that CEO pay does not reflect the greater productivity of CEOs), rather, it suggests that CEOs (and Boards of Directors) have significant power to extract compensation concessions.  This is more apparent to shareholders now since corporations have been forced to inform shareholders of the logic behind their CEO compensation decisions in their annual reports because of the Dodd-Frank Act of 2010.  In these reports, we generally find that Company A is comparing the compensation packages of its Named Executive Officers to those of Companies B, C, D, E etcetera.  With one company basing its NEO compensation on other like-minded companies, we can easily see how executive compensation levels have risen at what can only be termed extravagant levels.

The fact that, in 2010, an average S&P 500 CEO received annual compensation that was roughly 200 times the median household income in the United States in that year may have something to do with our perception that, even though there are jobs, we aren't being compensated fairly.  Increases in compensation have not broadened throughout the economy, rather, significant increases in compensation are restricted to a very elite group of men (mainly) and women that reside in upper floor corner offices, a change that has left the vast majority of Americans falling further and further behind the real cost of living.

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