Income inequality between the top 1 percent and 0.1 percent has outpaced that between the rich and everyone else. Compensation for CEOs is a major reason for that.
Americans know that economic inequality – the gap between the rich and everyone else – has grown significantly. But income inequality among the wealthy is growing even faster.
The New York Times reports that the income gap between the top 1 percent and top 0.1 percent has expanded even more than the divide between the 99 percent and the 1 percent. Economists have coined the phenomenon “fractal inequality.” The Times says:
It is not just that the rich have pulled away from the average American. It is that the richer you are, the more you have pulled away.
A report from the Economic Policy Institute says, “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.”
To put this into perspective, in 2012, the average household income was distributed as follows, according to the Times:
- $30,997 – bottom 90 percent.
- $1.26 million – top 1 percent.
- $6.37 million – top 0.1 percent.
Part of what’s driving this is CEO pay. “Executives, and workers in finance, accounted for 58 percent of the expansion of income for the top 1 percent and 67 percent of the increase in income for the top 0.1 percent from 1979 to 2005,” the institute report says.
From 1978 to 2011, compensation for chief executives skyrocketed 725 percent, while workers experienced a 5.7 percent increase, the Times reports. The ratio of chief executive to worker compensation has ballooned from 18-to-1 in 1965 to 209-to-1. The Times adds:
Not all of that increased compensation for managers is because of improving performance, either. The growth of earnings for executives has outpaced growth in the stock market or in corporate earnings, by a wide margin.
Several explanations have been offered for that — boards that are very CEO-friendly, and the “peer benchmarking” system of determining CEO pay.
James Surowiecki of The New Yorker explains:
They look at the CEO salaries at peer-group firms, and then peg their CEO’s pay to the 50th, 75th, or 90th percentile of the peer group — never lower. This leads to the so-called Lake Wobegon effect: Every CEO gets treated as above average. With all the other companies following the same process, salaries ratchet inexorably higher.
Thanks to new rules, we know more than we ever did about CEO pay. But now the Securities and Exchange Commission is considering a rule to require public companies to disclose the ratio between the CEO’s compensation and the median compensation of all other employees.
What do you think? Would that help control the growth of CEO pay? Share your comments below or on our Facebook page.
Karen Datko contributed to this post.