Executive Compensation and Income Inequality

How much has the compensation of top corporate executives really been going up? How much in comparison to their employees?

 

Today we finish our series on wages that we kicked off last week on Labor Day.

We’ve been looking at why wages for the majority of Americans has barely budged in the last decade or so even though we have continued to become more productive. For decades earlier, our wages had climbed significantly as our productivity increased. We’ve been looking at various factors that have created a disconnect between our greater productivity and our stalled wages.

The backdrop for all this is one of the biggest topics of the last couple years about our economy —arguably THE biggest topic—our increasing income equality. Today we look at some basic facts about income equality, and then focus a bit on the income of those of the highest earners. Understanding what is happening at the very top is crucial for understanding what is happening to everyone. 

The Lay of the Land of Income Inequality

In the thirty of so years from 1979 to 2010 the wages of 90% of workers—everybody except the top 10%–went up only about 15% in real dollars.

For the top 1%, the wage growth in that same period was about 131%. That’s about 9 times greater increase than the vast majority of us in the bottom 90%.

For the top 0.1% (one out of a thousand), the wage growth was about 278%. That about twice as much as the top 1%, and more than 18 times as much as the bottom 90%.

What this shows is that the income gap is increasing both between the bulk of workers and the very high earners (the top 1%), and also between that same bulk of workers and the very highest earners (the top 0.1%).

The Skyrocketing Share of All Income Received by the Top Earners

Based on information from federal tax returns, from 1979 to 2005 the share of total household income received by the top 1% of earners shot up from 9.7% to 21.0%. So their share of the pool of all income more than doubled.

The share of total income received by the top 0.1% of earners went up even more, from 3.3% to 10.3% of all income. That’s more than a tripling of their share of all income.

Notice that the top one-thousandth of households are receiving more than one-tenth of ALL annual income. And that the top one-hundredth of households are receiving more than one-fifth of ALL income.

The Increasing Income of Top Corporate Executives & Financial Sector Employees

Major drivers in the increased income of the top 1% and the top 0.1% are corporate executives and those in the financial sector. An astounding amount of the growth in these top incomes came from these two type of earners.

Based on the same information from federal tax returns from 1979 to 2005, households with income from non-finance executives accounted for 36% of the growth of the top 1%’s income share and 44% of the growth of the top 0.1%’s income share.

Households with income from finance executives and workers accounted for 23% of the growth of the top 1%’s income share and 23% of the growth of the top 0.1%’s income share.

Between these two sets of earners, they accounted for a high majority of the growth of these two top income’s shares: about 58% of the growth of the top 1%’s income share and about 67% of the growth of the top 0.1%’s income share.

Top CEOs’ Income Compared to the Income of Ordinary Workers

The compensation for CEOs of large corporations has skyrocketed in recent decades. The average total compensation (salaries, bonuses, and stock options exercised) for the CEOs of the 350 largest U.S. publicly traded corporations went from less than $800,000 in 1965, up to $1.4 million in 1978, up to $2.6 million in 1989, up to $5.6 million in 1995, and up to $19.5 million in 2000 (all in 2011 dollars). Note how these doubled or more each time in just a few years.

During the dozen plus years since 2000, CEO compensation has vacillated because of the dot-com/9-11 recession of 2001 and the Great Recession of 2007-2009, and their effect particularly on the value of stock options. But still, in 2011 CEO compensation was at $12.1 million and again climbing steadily upward.

The annual compensation of private-sector production/non-supervisory workers (which covers 89% of payroll employment) during those same years went from $38,000 in 1965, up to $48,000 in 1978, down to $44,000 in 1989, again about $44,000 in 1995, and up again to $46,000 in 2000 (again, all in 2011 dollars).  In the dozen plus years since 2000 this compensation has gotten back up to around $48,000, and to $51,000 at the highest point, in 2011. Note that these income amounts have gone up only by small amounts over all these decades.

Indeed, from 1978 to 2011, CEO compensation grew by more than 725% while worker compensation grew by a scant 5.7%.

The Ratio of CEO to Worker Wages

The ratio of CEO pay to worker pay has shot up over the decades. Comparing the compensation of the CEOs of these top 350 corporations to the compensation of workers in each of the corporations’ key industry: starting from a ratio of about 20 to 1 in 1965, it went up to 29 to 1 in 1978, then to 59 to 1 in 1989, shooting up to 123 to 1 in 1995, and then all the way to 383 to 1 in 2000. Again, because of the somewhat lower stock-option compensation for CEOs since then, that ratio has moderated. But for 2011 the average large corporation CEO still receives the compensation of 231 workers, and this ratio is again increasing.

 

NOTE: Much of the above, and of this series overall, is from The State of Working America, 12^th Edition, from the Economic Policy Institute. This is a nonpartisan, nonprofit organization “created in 1986 to broaden the discussion about economic policy to include the interests of low- and middle-income workers.”