When you cosider this it makes more sense.
Table 7: Share of capital income flowing to households in various income categories
Top 1% Top 5% Top 10% Bottom 80%
1979 37.8% 57.9% 66.7% 23.1%
1981 35.8% 55.4% 64.6% 24.4%
1983 37.6% 55.2% 63.7% 25.1%
1985 39.7% 56.9% 64.9% 24.9%
1987 36.7% 55.3% 64.0% 25.6%
1989 39.1% 57.4% 66.0% 23.5%
1991 38.3% 56.2% 64.7% 23.9%
1993 42.2% 60.5% 69.2% 20.7%
1995 43.2% 61.5% 70.1% 19.6%
1997 45.7% 64.1% 72.6% 17.5%
1999 47.8% 65.7% 73.8% 17.0%
2001 51.8% 67.8% 74.8% 16.0%
2003 57.5% 73.2% 79.4% 12.6%
Adapted from Shapiro & Friedman (2006).
Another way that income can be used as a power indicator is by comparing average CEO annual pay to average factory worker pay, something that Business Week has been doing for many years now. The ratio of CEO pay to factory worker pay rose from 42:1 in 1960 to as high as 531:1 in 2000, at the height of the stock market bubble, when CEOs were cashing in big stock options;. It was at 411:1 in 2005. By way of comparison, the same ratio is about 25:1 in Europe. The changes in the American ratio are displayed in Figure 6.
Figure 6: CEOs' pay as a multiple of the average worker's pay
It's even more revealing to compare the actual rates of increase of the salaries of CEOs and ordinary workers; from 1990 to 2005, CEOs' pay increased almost 300% (adjusted for inflation), while production workers gained a scant 4.3%. The purchasing power of the federal minimum wage actually declined by 9.3%, when inflation is taken into account. These startling results are illustrated in Figure 7.
Figure 7: CEOs' average pay, production workers' average pay, the S&P 500 Index, corporate profits, and the federal minimum wage, 1990-2005 (all figures adjusted for inflation)
Source: Executive Excess 2006, the 13th Annual CEO Compensation Survey from the Institute for Policy Studies and United for a Fair Economy.
If you wonder how such a large gap could develop, the proximate, or most immediate, factor involves the way in which CEOs now are able to rig things so that the board of directors, which they help select -- and which includes some fellow CEOs on whose boards they sit -- gives them the pay they want. The trick is in hiring outside experts, called "compensation consultants," who give the process a thin veneer of economic respectability.
The process has been explained in detail by a retired CEO of DuPont, Edgar S. Woolard, Jr., who is now chair of the New York Stock Exchange's executive compensation committee. His experience suggests that he knows whereof he speaks, and he speaks because he's concerned that corporate leaders are losing respect in the public mind. He says that the business page chatter about CEO salaries being set by the competition for their services in the executive labor market is "bull." As to the claim that CEOs deserve ever higher salaries because they "create wealth," he describes that rationale as a "joke," says the New York Times (Morgenson, 2005, Section 3, p. 1).
Here's how it works, according to Woolard:
The compensation committee [of the board of directors] talks to an outside consultant who has surveys you could drive a truck through and pay anything you want to pay, to be perfectly honest. The outside consultant talks to the human resources vice president, who talks to the CEO. The CEO says what he'd like to receive. It gets to the human resources person who tells the outside consultant. And it pretty well works out that the CEO gets what he's implied he thinks he deserves, so he will be respected by his peers. (Morgenson, 2005.)
The board of directors buys into what the CEO asks for because the outside consultant is an "expert" on such matters. Furthermore, handing out only modest salary increases might give the wrong impression about how highly the board values the CEO. And if someone on the board should object, there are the three or four CEOs from other companies who will make sure it happens. It is a process with a built-in escalator.
As for why the consultants go along with this scam, they know which side their bread is buttered on. They realize the CEO has a big say-so on whether or not they are hired again. So they suggest a package of salaries, stock options and other goodies that they think will please the CEO, and they, too, get rich in the process. And certainly the top executives just below the CEO don't mind hearing about the boss's raise. They know it will mean pay increases for them, too. (For an excellent detailed article on the main consulting firm that helps CEOs and other corporate executives raise their pay, check out the New York Times article entitled "America's Corporate Pay Pal", which supports everything Woolard of DuPont claims and adds new information.)
There's a much deeper power story that underlies the self-dealing and mutual back-scratching by CEOs now carried out through interlocking directorates and seemingly independent outside consultants. It probably involves several factors. At the least, on the worker side, it reflects an increasing lack of power following the all-out attack on unions in the 1960s and 1970s, which is explained in detail by the best expert on recent American labor history, James Gross (1995), a labor and industrial relations professor at Cornell. That decline in union power made possible and was increased by both outsourcing at home and the movement of production to developing countries, which were facilitated by the break-up of the New Deal coalition and the rise of the New Right (Domhoff, 1990, Chapter 10). It signals the shift of the United States from a high-wage to a low-wage economy, with professionals protected by the fact that foreign-trained doctors and lawyers aren't allowed to compete with their American counterparts in the direct way that low-wage foreign-born workers are.
On the other side of the class divide, the rise in CEO pay may reflect the increasing power of chief executives as compared to major owners and stockholders in general, not just their increasing power over workers. CEOs may now be the center of gravity in the corporate community and the power elite, displacing the leaders in wealthy owning families (e.g., the second and third generations of the Walton family, the owners of Wal-Mart). True enough, the CEOs are sometimes ousted by their generally go-along boards of directors, but they are able to make hay and throw their weight around during the time they are king of the mountain. (It's really not much different than that old children's game, except it's played out in profit-oriented bureaucratic hierarchies, with no other sector of society, like government, willing or able to restrain the winners.)
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