A Comparison of the Pay of Top Executives and Other Workers

CRS Report for Congress
A Comparison of the Pay of Top Executives
and Other Workers
Linda Levine
Specialist in Labor Economics
Domestic Social Policy Division
Although the reasons may have changed somewhat over time, the level of top
executive compensation long has been of interest to policymakers, shareholders, and
employees. Thus far in 2006, attention principally has centered on the pay of chief
executives at corporations whose profits have soared and whose product prices have
risen substantially (e.g., Exxon Mobil), as well as at corporations where shareholder
value has declined greatly (e.g., Pfizer and AT&T). Also during the current decade,
scrutiny has focused on senior executives who enjoy sizeable pay packages while
misstating their companies’ financial condition and thereby not only harming
shareholders, but also those employees with pensions invested heavily in their bankrupt
employers’ stock (e.g., Enron). While the amount of executive salaries, bonuses, and
long-term incentives sometimes is looked at in isolation, a comparison often is made
between the pay package of senior executives and of employees in general to
demonstrate the alleged unfairness of the corporate wage structure. The focus of this
report, which will not be updated, is on the size of average executive and worker pay
through 2004.
Both worker and shareholder interests coalesced in the 1980s to bring the issue of
top executive pay to the attention of policymakers. From the worker perspective, efforts
at curbing labor costs to improve competitiveness were not shared by corporate heads
whose large pay raises were thought by some to have contributed to the growth in wage
inequality during that period. From the shareholder viewpoint, their interests and those
of executives would be more closely aligned by linking raises to company performance
through the use of stock-related incentives.
The stock-based, pay-for-performance share of executive compensation did indeed
increase over time. However, concern arose in the 1990s about rewarding mediocre
performance in a booming stock market; executives’ attention becoming too focused on

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near-term movements in stock prices rather than on other performance measures over a
longer time horizon; and diluting per-share earnings due to the increased issuance of stock
Some of the issues of interest during the 1980s have resurfaced during the current
decade. For example, the divergence between corporate performance and executive
compensation — that is, between the returns to shareholders and to executives — has
again garnered public interest (e.g., Pfizer and AT&T).1 Similarly, concern has focused
on the compensation of executives at companies that have sought concessions from their
employees in order to avoid bankruptcy (e.g., several airlines). More generally, questions
have arisen about the relative share of corporate profits that have gone to executives and
shareholders versus employees.
With the recent spike in gasoline prices, attention principally has turned to the pay
of chief executives at oil corporations whose profits have soared (e.g., Exxon Mobil).
The Enron trial of Ken Lay, held in the spring of 2006, also has reminded the public that
some very well-paid corporate executives misstated their companies’ financial condition,
which not only harmed shareholders, but also employees whose pensions largely consisted
of stock in their bankrupt companies.
The Pay of Top Executives and of Other Workers
Three arguments typically are made on behalf of the comparatively large pay
packages awarded to senior executives:
!first, their size is commensurate with the job’s weighty responsibilities;
!second, they are necessary to prevent executives from leaving for greener
pastures; and
!third, the comparatively small pool of qualified candidates elevates their
compensation levels.
It is asserted in response that compensation in the top executive labor market is not set by
supply-demand conditions, but rather is administered by corporate directors who
unnecessarily limit the number of candidates they are willing to consider for high-level
positions. It also often is pointed out that many of those asked to serve on corporate
boards are themselves current or former senior executives.
Regardless of the reasons for the gap between top executive and worker pay, its
precise magnitude partly depends on how executive compensation is measured and on the
makeup of the comparison employee group. Compensation differs if it is reported as a2

median or average (mean) because the latter may be raised by a few large observations.
1 Alan Murray, “CEOs of the World, Unite? When Executive Pay Can Be Truly Excessive,” Wall
Street Journal, Apr. 26, 2006.
2 For comparison purposes, one might want to look at the mean 2004 figures from Business Week
shown in Table 1 ($9.6 million) and the median statistics for 2004 ($5.9 million) calculated by
Mercer Resource Consulting in “CEO Compensation Survey (A Special Report); Who Makes the

The direct relationship between firm size and executive pay means that a large sample of
firms, which is more likely to include smaller firms, typically produces a lower pay
estimate than a small sample. Results also vary based on who is surveyed (e.g., chief
executive officers or presidents), on what is counted (e.g., whether housing allowances,
company cars, and club memberships are included), and on how a value is determined
(e.g., the realized value of stock options in the year they are exercised or their estimated
value in the year they are granted).
Table 1 presents data on the average compensation of the highest-paid executives
at 300-400 of the nation’s largest publicly held corporations, as reported by Business
Week; and on the average annual earnings of non-management employees of firms in the
private nonfarm sector of the economy, as reported by the establishment survey of the
U.S. Bureau of Labor Statistics. (Business Week stopped reporting its long-running
executive compensation series effective with the 2005 article that presented data for 2004.
Accordingly, this report will not be updated.)
The second half of the 1990s was characterized by very substantial absolute and
percentage gains in the average compensation of senior executives at large publicly held
corporations. The growth came much more from stock-based incentives than from the
salary-and-bonus component of pay packages. With the average earnings of production
and non-supervisory employees rising to a much smaller extent, the compensation of these
executives climbed to more than 500 times the paychecks of most other workers by 1999.
Table 1. Average Top Executive and Worker Pay
Ratio of
worker to
Executive (Exec.) payexecutive payPercent change (%)
Workerand bonuscompensa-Exec.Exec.Worker
Yearpay(S&B)tion (TC)S&BTCS&BTCpay
2004an.a.$9,600,000$27,485 — 1:349 — 15.72.2
2003n.a.8,300,00026,900 — 1:308 — 12.22.2
2002n.a.$7,400,00026,316 — 1:281 — -32.72.6
2001n.a.11,000,00025,646 — 1:429 — -16.02.7
2000n.a.13,100,00024,981 — 1:524 — -5.63.9
1999 $2,300,000 12,400,000 24,049 1:96 1:516 9.5 16.9 3.2
1998 2,100,000 10,600,000 23,298 1:90 1:455 -4.5 35.9 3.9
1997 2,200,000 7,800,000 22,425 1:98 1:348 -4.3 34.9 4.5

1996 2,300,000 5,781,300 21,462 1:107 1:269 39.1 54.3 3.3

2 (...continued)
Biggest Bucks” and “CEO Compensation Survey (A Special Report); Adding It All Up,” Wall
Street Journal, Apr. 10, 2006. Note: The executive compensation figure reported by the Wall
Street Journal for 2005 is $6.0 million.

Ratio of
worker to
Executive (Exec.) payexecutive payPercent change (%)
Workerand bonuscompensa-Exec.Exec.Worker
Yearpay(S&B)tion (TC)S&BTCS&BTCpay
1995 1,653,760 3,746,392 20,776 1:80 1:180 18.2 30.0 2.3
1994 1,399,698 2,880,975 20,318 1:69 1:142 9.8 -25.0 3.3
1993 1,274,893 3,841,273 19,677 1:65 1:195 15.4 0.0 2.9
19921,104,769 3,842,24719,1271:581:201-1.855.82.8
1991 1,124,770 2,466,292 18,619 1:60 1:132 7.4 26.3 2.5
1990 1,214,090 1,952,806 18,163 1:67 1:108 3.5 5.2 3.3
1989 1,172,533 1,856,697 17,581 1:67 1:106 3.9 -8.3 3.6
1988 1,128,854 2,025,485 16,967 1:67 1:119 16.9 12.5 3.0
1987 965,617 1,800,000 16,474 1:59 1:109 16.4 50.0 2.4
1986 829,887 1,200,000 16,095 1:52 1:75 22.2 0.0 1.6
1985 679,000 1,200,000 15,843 1:43 1:76 4.0 9.1 2.4
1984653,0001,100,00015,4781:421:71 — 76.023.6
1980n.a.624,99612,520 — 1:50 — 13.991.4

1970n.a.548,7876,542 — 1:84 — — —

Source: Business Week, various issues, and U.S. Bureau of Labor Statistics’ (BLS) establishment survey
Note: The Business Week survey covers the highest paid executives at 300-400 of the nations largest
publicly held corporations. The BLS data relate to average weekly earnings of production or
nonsupervisory employees on private nonfarm payrolls multiplied by 52 weeks.
a. In 2004, Business Week utilized a new methodology that counted the value of options in the year in
which they were granted. In past years, the value of options was included in the compensation
package in the year in which they were exercised. Executive compensation figures for 2003 and
earlier years thus are not strictly comparable with 2004 data.
n.a. = not available.
The course of average executive compensation has been mixed thus far in the current
decade. Average salary, bonus, and long-term incentives initially declined at an
accelerating pace between 2000 and 2002. This short-term trend likely reflects the poor
performance of the stock market at the time and the reportedly closer scrutiny given pay-
setting by some corporate boards of directors. By 2002, top executive compensation had
fallen to a level last seen five years earlier (less than $8 million in 1997). Since then, the
pattern has reversed direction. In 2004, the average compensation of executives in
Business Week’s sample rose to $9.6 million, or more than 300 times the wages of most
workers in the private nonfarm sector. The average compensation of senior executives
increased at more than seven times the rate of production and non-supervisory workers
(15.7% and 2.2%, respectively) between 2003 and 2004. Part of the divergence in
earnings gains probably is related to the improved performance of the stock market.

Some speculate that the double-digit rates of compensation increases consistently
posted by senior executives in the mid- to late-1990s are unlikely to return because
shareholders presumably would not soon forget the extravagance and wrong-doing of
some top executives. Corporate directors allegedly are more closely overseeing the
compensation packages awarded to senior executives, who must surpass higher
performance thresholds in order to receive stock options. And options may be giving way
to restricted stock grants. Less sanguine observers note, however, that those who set
executive pay have been known to be quite creative. For many years now, “perks,” such
as access to corporate jets for personal use and contributions to home mortgages, among
other things, have been a growing part of executive compensation. Indeed, top executive
compensation grew by double digits between 2002 and 2004 — albeit well below the
gains of the mid- to late-1990s.