CEO pay may not be quite as high as it once was, but the numbers still dwarf the pay earned by the typical worker.
Chief executives of America’s 350 largest companies made an average of $15.6 million in 2016, or 271 times more than what the typical worker made last year, according to the Economic Policy Institute’s annual report on executive compensation released Thursday. The report from the left-leaning think tank said that number was slightly lower than 2015, when average pay was $16.3m and the ratio was 286-to-1.
While that’s well below the 376-to-1 ratio EPI calculated in 2000 — the high-water mark for CEO pay — it’s still multiples above where it was in 1989, when the ratio was 59-to-1, or in 1965, when it was 20-to-1, using 2016 dollars.
“The very highest paid [CEOs] may be receiving less this year than last when you include how much they received from cashing out their stock options,” said Lawrence Mishel, president of EPI and one of the authors of the report, in an interview. “But CEO pay remains extraordinarily high relative to what’s happened to stock prices, wages of other high earners or corporate profits.”
It also remains high compared to what people imagine the gap to be. One study from 2014 found that Americans think the gap between executives and unskilled workers is about 30 to 1; a 2016 survey from the Stanford Graduate School of Business showed that the median respondent guessed the largest companies’ CEOs make about $1m a year, a gross underestimate.
EPI’s calculations are based on stock options that have been “realised,” or cashed in, by the executive. Yet if they based the figures on the value of the options at the time they are granted to the CEO — the approach companies use in their proxy reports to investors — CEO compensation actually rose slightly, from $12.5m in 2015 to $13m in 2016, nudging up the ratio, too. As a result, Mishel said, it’s unclear whether the downshift in pay is a real trend or because of fluctuations in the stock market. In its report, EPI cited a shrinkage of realised stock options as a reason for the decline.
EPI’s three-digit ratio compares CEO pay to the average annual compensation — full-time, non-seasonal wages and benefits — of a production or nonsupervisory employee working in the private sector. (Another calculation done by the AFL-CIO puts the gap at 347-to-1 gap, but it includes part-time workers in its analysis, Mishel noted.) Yet EPI also includes a comparison to employees at the very top of the compensation spectrum — those who fall in the top 0.1 per cent of wage earners. CEOs still make multiples of even those most highly compensated employees: More than five times as much in 2015, up from 2.6 times as much in 1989.
The CEO-to-worker pay ratio has been getting much more attention in recent years after a controversial measure was included in the Dodd-Frank Act that would require individual companies to calculate their CEO’s pay to the median pay of their workers starting next year. The rule was thought to be dead on arrival under a Trump White House, which has said it wants to “dismantle” the financial reform act; a repeal of the rule was included in the Financial Choice Act that passed the Republican-controlled House in June. But compensation experts say competing priorities in Washington, a limited number of commissioners on the US Securities and Exchange Commission, and the slow pace of legislation could mean companies will very well end up disclosing their ratios next year.
If they do, Mishel said, some of those numbers could be eye-popping compared to the figure in his analysis. “The ratios I’m talking about are going to be a lot smaller than the ratios they will publish,” he said. “We’re looking at CEO compensation relative to American workers. Most of these companies have foreign workers who are going to earn a lot less.”
—Bloomberg/The Washington Post News Service
Published in Dawn, The Business and Finance Weekly, July 24th, 2017
