Salary Differential: Workers vs CEO's

Workers, top executives pay gap skyrockets
Detroit Free Press
Dec. 19rh, 2002
By Julie Moran Alterio, and Jerry Gleeson / Westchester (N.Y.) Journal News

A September 2001 study by National Bureau of Economic Research in Cambridge, Mass., compared income of average workers with the average compensation of the country's 100 top CEOs. The figures were adjusted to 1998 dollars.

In 1970, the average full-time worker earned $32,522, according to the National Institute of Pension Administrators. During that same year, average compensation among the top 100 CEOs was $1.25 million, according to Forbes magazine's annual survey, which includes salary, bonus, the value of restricted stock awards and stock options exercised.

In 1999, the average worker's pay had climbed only slightly, to $35,864. The average compensation of the 100 top CEOs had increased more than 2,800 percent, to $37.5 million.

"Executives have experienced huge gains compared to the average pay," said economics professor Emmanuel Saez of University of California at Berkeley, one of the study's authors.

There are a variety of explanations, starting with the drastic drop in taxes on top earners. Back in the 1960s, the top tax rate was above 70 percent, Saez said, making high salaries less attractive. Today, the top rate is 38 percent and is due to drop to 35.

"At a time when tax rates were very high, in some sense paying executives a lot amounted to giving a lot to the government. So corporations were reluctant to do so," Saez said.

Today, a bigger share of the average CEO's compensation comes in forms other than wages.

Workers receive the bulk of their compensation through salary, although many also invest in 401(k) plans and receive modest stock options. That was once true for CEOs as well. In 1970, the top 100 CEOs derived 84.66 percent of their income from salary and just 15.34 percent from stock options and other compensation, according to the National Bureau of Economic Research study.

In 1999, salary accounted for just 9.73 percent of the compensation of top CEOs. Stock options provided 58.52 percent and other compensation accounted for 31.76 percent.

Because corporations can only deduct the first $1 million of CEO pay from their taxes, providing additional compensation in other forms becomes very attractive financially.

Corporate boards have been willing to pony up, but are the CEOs worth the fat paychecks? "My own belief is that they are not, but it's controversial because it's hard to answer that question scientifically," Saez said.