US CEOs see pay increase by 3.9%

The compensation of chief executives in the 350 largest US firms rose by 3.9% in 2014, and is up 54.3% on levels recorded at the beginning of the economic recovery in 2009, according to figures from the Economic Policy Institute (EPI) think tank. The authors of the report, Lawrence Mishel and Alyssa Davis, found that from 1978-2004, inflation-adjusted CEO compensation increased by a staggering 997%, almost double the rate of stock market growth over the same period and substantially more than the 10.9% growth in a typical employee’s compensation over the same period. Consequently, the CEO-worker pay ratio stood at 303:1 in 2014, lower than the 376:1 observed in 2000 (but still far higher than the 20:1 ratio in 1965).

Other key findings from the latest EPI research are:

  • The average compensation received by a CEO in one of the largest US firms was $16.3 million in 2014. This estimate uses a comprehensive measure of CEO pay that covers chief executives of the top 350 US firms and includes the value of stock options exercised in a given year.
  • The fact that CEO pay grew far faster than the pay of the top 0.1% of wage earners indicates that CEO compensation growth does not simply reflect the increased value of highly paid professionals in a competitive race for skills (the “market for talent”), but rather reflects the presence of substantial “rents” embedded in executive pay (meaning CEO pay does not reflect greater productivity of executives but rather the power of CEOs to extract concessions). The EPI concludes: “If CEOs earned less or were taxed more, there would be no adverse impact on output or employment”.
  • Its critics argue that looking at the pay of CEOs in only the largest firms distorts the true picture. However, the EPI argues that the average firm is very small, employing just 20 workers, and does not represent a useful comparison to the pay of a typical worker who works in a firm with roughly 1,000 workers. Just over half (52%) of US employment and 58% of the total workforce are in firms with more than 500 employees.

Mishel and Davis conclude:

‘We have argued above that high CEO pay reflects rents, concessions CEOs can draw from the economy not by virtue of their contribution to economic output but by virtue of their position. Consequently, CEO pay could be reduced and the economy would not suffer any loss of output. Another implication of rising executive pay is that it reflects income that otherwise would have accrued to others: what the executives earned was not available for broader-based wage growth for other workers.’
‘Top CEOs Make 300 Times More than Typical Workers’, Issue Brief 399, by Lawrence Mishel and Alyssa Davis. Published by the Economic Policy Institute in June 2015. Download the report here: