That the incomes of the top 1 percent have fared fabulously is well known, and deservedly so. But it was not until the analysis of tax returns by Jon Bakija, Adam Cole, and Bradley Heim that it could be documented that the doubling of the income share of the top 1 percent could be directly traced to executive compensation and finance-sector compensation trends. The new EPI paper, CEO pay and the top 1%: How executive compensation and financial-sector pay have fueled income inequality, which previews some of the findings from the forthcoming State of Working America, does exactly that.

Between 1979 and 2005 (the latest data available with these breakdowns), the share of total income held by the top 1.0 percent more than doubled, from 9.7 percent to 21.0 percent, with most of the increase occurring since 1993. The top 0.1 percent led the way by more than tripling its income share, from 3.3 percent to 10.3 percent. This 7.0 percentage-point gain in income share for the top 0.1 percent accounted for more than 60 percent of the overall 11.2 percentage-point rise in the income share of the entire top 1.0 percent.

The increases in income at the top were largely driven by households headed by someone who was either an executive or in the financial sector as an executive or other worker. Households headed by a non-finance executive were associated with 44 percent of the growth of the top 0.1 percent’s income share and 36 percent in the growth among the top 1.0 percent. Those in the financial sector were associated with nearly a fourth (23 percent) of the expansion of the income shares of both the top 1.0 and top 0.1 percent. Together, finance and executives accounted for 58 percent of the expansion of income for the top 1.0 percent of households and an even greater two-thirds share (67 percent) of the income growth of the top 0.1 percent of households.

The paper also presents new analysis of CEO compensation based on our tabulations of Compustat data. From 1978–2011, CEO compensation grew more than 725 percent, substantially more than the stock market and remarkably more than the annual compensation of a typical private-sector worker, which grew  a meager 5.7 percent over this time period.

One way to illustrate the increased divergence between CEO pay and a typical worker’s pay over time is to examine the ratio of CEO compensation to that of a typical worker, the CEO-to-worker compensation ratio, as shown in the figure. This ratio measures the distance between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.

Measurement

This overall CEO-to-worker compensation ratio is computed in two steps. The first step is to compute, for each of the largest 350 firms, the ratio of the CEOs compensation to the annual compensation of workers in the key industry of their firm (data on the pay of workers in any particular firm are not available). The second step is to average that ratio across all the firms. The data are the resulting ratios in every year. The trends prior to 1992 are based on the changes in average CEO and private-sector worker compensation.

The figure uses two measures of CEO compensation which differ only in their treatment of stock options: one incorporates stock options according to how much the CEO realized in that particular year (by exercising stock options available), and the other incorporates the value (the Black Scholes value) of stock options granted that year. Besides stock options, each measure includes the sum of salary, bonus, restricted stock grants, and long-term incentive payouts. Worker compensation is the full-time, full-year annual wage of production and nonsupervisory workers plus benefits. Complete methodological detail is provided in a working paper.