Lawrence Mishel, Josh Bivens, and Alyssa Davis Have Convinced Me that Steve Kaplan Is Largely Wrong on CEO Pay: Monday Focus for June 23, 2014

In the 1970s and 1980s CEOs received about three times the average earnings of the top 0.1%-ile and about 45 times the earnings of the average worker. Today CEOs receive about 5 tuies the earnings of the top 0.1%-ile and about 300 times the earnings of the average worker. I am now convinced that there is an extra, corporate-control and finance-driven story to CEO pay that does not apply to the earnings of the top 0.1%-ile in general. What might it be? A self-reinforcing iron oligarchy of effective control rights redirecting cash flows in which CEOs, board members, and financiers all of whom form a social network in which it is impolite not to treat each other as well as possible seems inadequate as an explanation, but that seems to be what we have…

Mishel and Davis:

Kaplan:

While average pay has increased markedly in the last 30 years, the ratio of pay to the top 0.1 percent has increased by much less. The ratio increased from the mid-1980s to the turn of the century. Since then, it has declined, although it remains above its historical average and the level in the mid-1980s. Interestingly, the ratio in 2007 was lower than the ratio in the late 1930s when dispersed shareholdings and problems of managerial power were presumably less acute than they are today. The ratio today is modestly higher than in the late 1930s. The unanswered question, then, is to explain what drove the ratio so high from the early 1980s to the early 2000s and has led to its decline since then…. Holmstrom and Kaplan (2001) and Murphy (2012) both suggest that the relatively low pay of CEOs at the start of the 1980s was suboptimal at the start of the 1980s. In summary, taken together, Figures 15 to 18 suggest that a combination of firm scale and the market for talent are associated with a meaningful amount of the movement of large company CEO pay over time.

More from Mishel and Davis:

Lawrence Mishel and Alyssa Davis: CEO Pay Continues to Rise as Typical Workers Are Paid Less: “The 1980s, 1990s, and 2000s were prosperous times…

…for top U.S. executives, especially relative to other wage earners and even relative to other very high wage earners (those earning more than 99.9 percent of all wage earners)…. Consequently, the growth of CEO and executive compensation overall was a major factor driving the doubling of the income shares of the top 1.0 percent and top 0.1 percent of U.S. households from 1979 to 2007….

1. Average CEO compensation was $15.2 million in 2013… up 2.8 percent since 2012 and 21.7 percent since 2010….
2. From 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation….
3. Over the last three decades, CEO compensation grew far faster than that of other highly paid workers, those earning more than 99.9 percent of other wage earners. CEO compensation in 2012 was 4.75 times greater than that of the top 0.1 percent of wage earners, a ratio 1.5 higher than the 3.25 ratio that prevailed over the 1947–1979 period….

That CEO pay grew far faster than pay of the top 0.1 percent of wage earners indicates that CEO compensation growth does not simply reflect the increased market value of highly paid professionals in a competitive market for skills (the “market for talent”) but reflects the presence of substantial rents embedded in executive pay….

CEO compensation has grown a great deal, but so has pay of other high-wage earners. To some analysts this suggests that the dramatic rise in CEO compensation was driven largely by the demand for the skills of CEOs and other highly paid professionals. This interpretation, then, is that CEO compensation is being set by the market for “skills” and is taken as evidence that rising CEO compensation is not due to managerial power and rent-seeking behavior (Bebchuk and Fried 2004). One prominent example of the “it’s other professions, too” argument comes from Kaplan (2012a, 2012b)…. Kaplan (2012a, 4) claimed:

Over the last twenty years, then, public company CEO pay relative to the top 0.1 percent has remained relatively constant or declined. These patterns are consistent with a competitive market for talent. They are less consistent with managerial power. Other top income groups, not subject to managerial power forces, have seen similar growth in pay.

And in a follow-up paper for the CATO Institute, published as a National Bureau of Economic Research (NBER) working paper, Kaplan (2012b, 21) expanded this point further:

The point of these comparisons is to confirm that while public company CEOs earn a great deal, they are not unique. Other groups with similar backgrounds—private company executives, corporate lawyers, hedge fund investors, private equity investors and others—have seen significant pay increases where there is a competitive market for talent and managerial power problems are absent. Again, if one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why these professional groups have had a similar or even higher growth in pay. It seems more likely that a meaningful portion of the increase in CEO pay has been driven by market forces as well.

Bivens and Mishel (2013)… CEO compensation grew far faster than compensation of other highly paid workers over the last few decades…. We employ Kaplan’s own series on CEO compensation and compare it to the incomes of top households, as he does… [and] a better standard, the wages of top wage earners…. CEO compensation grew from 1.14 times the income of the top 0.1 percent of households in 1989 to 1.85 times top 0.1 percent household income in 2012. CEO pay relative to pay of top 0.1 percent wage earners grew even more, from a ratio of 2.68 in 1989 to 4.75 in 2012…. Is this a large increase?…

I genuinely do not see why Steve Kaplan is claiming that there is no CEO pay increase fact at all different from the top 0.1% earnings increase fact: there definitely is something else going on.