CEO pay and the top 1%

By:  Lawrence Mishel and Natalie Sabadish

Growing income inequality has a number of sources, but a distinct aspect of rising inequality in the United States is the wage gap between the very highest earners-those in the upper 1.0 percent or even upper 0.1 percent-and other earners, including other high-wage earners. Driving this ever-widening gap is the unequal growth in earnings enjoyed by those at the top. The average annual earnings of the top 1 percent of wage earners grew 156 percent from 1979 to 2007; for the top 0.1 percent they grew 362 percent (Mishel, Bivens, Gould, and Shierholz 2012). In contrast, earners in the 90th to 95th percentiles had wage growth of 34 percent, less than a tenth as much as those in the top 0.1 percent tier. Workers in the bottom 90 percent had the weakest wage growth, at 17 percent from 1979 to 2007.

The large increase in wage inequality is one of the main drivers of the large upward distribution of household income to the top 1 percent, the others being the rising inequality of capital income and the growing share of income going to capital rather than wages and compensation (Mishel and Bivens 2011). The result of these three trends was a more than doubling of the share of total income in the United States received by the top 1 percent between 1979 and 2007 and a large increase in the income gap between those at the top and the vast majority. In 2007, average annual incomes of the top 1 percent of households were 42 times greater than in­comes of the bottom 90 percent (up from 14 times greater in 1979), and incomes of the top 0.1 percent were 220 times greater (up from 47 times greater in 1979).

Just as wage inequality is a key driver of income inequality, a key driver of wage inequality is the growth of chief executive officer earnings and compensation and the expansion of and high compensation in the financial sector. This paper uses data from EPI's upcoming The State of Working America, 12th Edition (Mishel, Bivens, Gould, and Shierholz 2012) to document and explain these trends. Our analysis first examines the role of executives and the financial sector in the growth of incomes of the top 1 percent and then presents new findings on the growth of CEO compensation back to 1965, including the growth of the CEO-to-worker compensation ratio.

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