Last fall, as the GOP and the Trump administration worked overtime to sell the American public on its package of tax cuts, Kevin Hassett, chair of the president’s Council of Economic Advisors, made a bold prediction: The average American household would see their annual income increase by $4,000-$9,000 due to the legislation’s business tax cuts. Hassett also said he expected to see “an immediate jump in wage growth.” And while most in the GOP were hesitant to go quite as far as Hassett, the promise that corporate tax cuts would boost worker pay was a central selling point of the plan. Most economists were skeptical of this promise.
So far, however, the promised wage growth has yet to materialize for most Americans. But according to a new report released this morning by Lawrence Mishel and Jessica Schieder of the Economic Policy Institute, a progressive think tank, there’s one group of Americans who got a big raise in 2017: chief executive officers of large American firms.
In 2017, the “average CEO of the 350 largest firms in the United States received $18.9 million in compensation, a 17.6 percent increase over 2016,” the report states. (By another measure, which includes stock options granted, average CEO compensation rose from $13.0 million in 2016, to $13.3 million in 2017.)
As illustrated in the graph below, from the report, CEO compensation has been increasing steadily since the 1970s, although the increases grew more pronounced beginning in the 1990s:
Between 1978 and 2017, CEO compensation (including stock options realized) increased by 1,070 percent, according to the Economic Policy Institute report. During this same time period, compensation for the typical American worker increased by 11.2 percent.
Mishel and Schieder conclude that the increase in compensation (which includes stock options realized) was driven by the stock components of CEO compensation (i.e., not by higher salaries or cash bonuses). “The sharp growth in realized stock options in 2017 occurred as executives cashed out their accumulated unexercised options, as indicated by the sharp decline in unexercised stock options,” the researchers write. “In other words, CEOs cashed in on a rising stock market in 2017 (up 15–19 percent, depending on the stock index … much faster growth than in the previous two years).”
Today, as a result of this surge, the average CEO’s compensation (including stock options realized) is 312 times that of the typical worker, a ratio that’s dramatically higher than the 1980s (although still not quite as high as in 2000):
Meanwhile, the ratio of CEO pay to the earnings of the top 0.1 percent has also risen dramatically in recent decades.
There’s an ongoing debate among economists over whether and how CEO compensation, and the compensation of top earners more broadly, affects the compensation of typical American workers. CEO compensation is, however, undoubtedly a driver of income inequality in the U.S., and Mishel and Schieder argue that it’s directly hurting typical workers.
“Another implication of rising CEO 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,” the researchers conclude.
The Trump administration maintains that wage growth for average Americans will come, although even fans of the tax reform legislation suggest it may not be “immediate.” In a report released yesterday, the Tax Foundation, a center-right think tank whose modeling of the Tax Cuts and Jobs Act‘s effects has typically been more optimistic than most other models, projected that long-term wages will increase by 1.5 percent. Nicole Kaeding, the Tax Foundation’s director of federal projects, told the Washington Post that they “definitely think it’s going to take a few years for this to obviously manifest.”
