Annual Economic Policy Institute Report Shows Average CEO "Realized Pay" Increased 17.6% in 2017 After Two Years of Declines
August 18, 2018
This week, the Economic Policy Institute issued its annual executive compensation study, reporting that average realized pay among the CEOs of the largest 350 companies by sales was $18.9 million in 2017. This total compares to $16 million in 2016 and $16.3 million in 2015 (both years in which total CEO pay declined), but noted that the 2017 increase was driven by increases in the stock market (which jumped 14.5% in value from 2016 to 2017 when adjusting for inflation). The report defines realized pay as reported salary, bonus, the grant date value of restricted stock and long-term incentive payouts. The report states that the ratio of CEO to the average annual pay of the “typical worker” was 312-to-1 compared to 271-to-1 in 2016. EPI is a think tank which focuses its research on low and middle income workers and is frequently critical of executive pay. It is interesting to note that the report continues to focus on the impact of stock options, even though stock options comprise a much smaller share of total CEO granted pay today compared to five years ago.
The study also looked at grant-date pay, noting a much smaller increase from $13 million in 2016 to $13.3 million in 2017, but is quick to point out that either way, CEO pay has grown faster than stock prices or corporate profits - when looked at over forty years. However, the authors then suggest that strong alignment of CEO pay and stock price is an indicator that CEO pay is not market-based, since pay increases with absolute growth in profits and stock price, not relative to peers. It argues that “CEOs are getting more because of their power to set pay, not because they are more productive or have special talents or more education,” even though, in many cases, CEO pay correlates to the size of the company. Concluding that a decrease in CEO pay would result in "no adverse impact on output or employment," the paper recommends the following policy adoptions (almost identical to last year’s paper) and primarily focused on taxation:
Reinstate higher marginal income tax rates for high earners
Set corporate tax rates higher for firms that have higher pay ratios
Set a cap on compensation and tax anything over the cap
Strengthen the power of Say on Pay votes.
The report's release coincided with the introduction of legislation by Senator Elizabeth Warren (D-MA) which seeks in part to focus boards on accountability to employees.