Notes on Steven Kaplan's Feldstein Lecture: "Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges"
Steven Kaplan's Feldstein lecture as delivered:
I staple together three data sets. I use ExecuComp data for S&P 500 CEOs from 1992 to 2010. I use the Hall and Leibman data for large company CEOs from 1980 to 1992. And I use the Frydman and Saks data for large company CEOs from 1936 to 1980. And I compare this long time series of CEO pay again to the average AGI of the top 0.1%.
Over the long term, estimated CEO pay relative to the average AGI of that top 0.1 percent has remained stable--it has fluctuated--at around 1.95. The average is actually particularly low in the 1980s. It goes to the historical average in the mid-1990s. It becomes unusually high in the late 1990s. And in 2010 it has returned to its long-term average. There is the question of what drives these fluctuations over time, but there seems to be a tendency to stay around 2.
Steven Kaplan's Feldstein lecture as written up:
I staple together three data sets of estimated pay--ExecuComp data for S&P 500 CEOs from 1992 to 2010, the Hall and Leibman data for large company CEOs from 1980 to 1992, and the Frydman and Saks data for large company CEOs from 1936 to 1980.
Figure 3 shows average estimated CEO pay in 2010 dollars and the ratio of that CEO pay to the average AGI of the top 0.1 percent from 1936 to 2010. While average pay has increased markedly in the last 30 years, the ratio of pay to the top 0.1 percent has increased by much less. The ratio increased from the mid-1980s to the turn of the century. Since then, it has declined, although it remains above its historical average. Interestingly, the ratio in 2007 was lower than the ratio in the late 1930s when dispersed shareholdings and problems of managerial power were presumably less acute than they are today. The unanswered question from these patterns is what drives the fluctuations over time.
Mankiw, Kaplan, CEO Pay and the Defense of the 1 Percent: Kaplan’s Feldstein lecture (page 4) concluded that CEO relative pay “has remained relatively constant or declined.” Kaplan’s CATO paper (page 14) finds that the ratio “remains above its historical average and the level in the mid-1980s.” It may seem odd that the conclusions differ but it isn’t: Kaplan made a (still unacknowledged) computation error in the Feldstein lecture that was corrected in the later paper. In both papers Kaplan concludes that CEO pay seems to track that of other high earners but never provides any metric…. Kaplan’s ratio of CEO pay to top household incomes in 2010 (2.06) was nearly double the historical (1947–1979) average of 1.11…. CEO pay relative to top wage earners in 2010 was 4.70 in 2010, 1.54 higher than the historical average of 3.08 (adding the wages earned by more than 1.5 high wage earners to CEO relative pay)…. Other CEO pay series, such as the one produced by Frydman and Saks (pdf) would show an even larger gain. These metrics indicate that CEO pay relative to that of other high earners has grown considerably…