Between 1978 and 2019, the S&P 500 index has grown by 741%. In the same period, chief executive officers have seen their pay increase by 1,167%. A typical worker saw wages rise by 13.7% between 1978 and last year.
The CEO of one of the top 350 U.S. firms was paid average realized compensation of $21.3 million in 2019, according to the latest study of CEO compensation released Tuesday by the Economic Policy Institute (EPI). The 2019 average represents a 14% year-over-year increase in realized CEO compensation and sends the average pay ratio between a CEO and a typical worker to 320-to-1.
The EPI report notes that about three-quarters of CEO pay is related to company stock prices. How a CEO actually makes the firm more productive is irrelevant. As Lawrence Mishel and Jori Kandra, the study’s authors, put it: “The economy would suffer no harm if CEOs were paid less (or were taxed more).”
EPI changed its definition of CEO compensation this year, using a “realized” value for CEO stock grants rather than a “granted” value. The realized measure captures the value of the stock when a CEO exercises the right to buy the shares, capturing the change in the stock’s value as the shares vest.
CEO compensation has shifted away from stock option awards and toward outright stock awards. According to EPI data, “Vested stock awards and exercised stock options totaled [$]16.7 million in 2019 and accounted for 78.6% of average realized CEO compensation.”
Stock awards, rather than options, recently have been more widely adopted because CEOs (and their boards) have come to believe that options, which only pay off if the stock price rises, “might lead options-holding CEOs to take excessive risks to bump up the stock price.” A stock award simply tracks the share price, aligning more closely with shareholder interests.
Cash payments for salaries, bonuses and incentives have remained relatively stable between 2016 and 2019 at around $3.2 million. Last year’s most highly paid CEO received total compensation of $53 million, only $2.2 million of which was paid in salary and bonuses.
Mishel and Kandra argue for enacting policies that “both reduce incentives for CEOs to extract economic concessions and limit their ability to do so.” These policies might include higher marginal tax rates for the highest earners and raising corporate tax rates for companies with higher CEO pay to worker salary ratios, among other things.