Todd Henderson has a very interesting post on the relationship between income inequality and executive pay. He notes a correlation between the rise in executive pay and income inequality starting around 1980. Correlation is not causation, of course, especially because the number of CEOs is too small to drive the inequality numbers. He observes, however, that:
The cause of the change of executive compensation is well understood. Starting in the early 1980s, executives started to be paid like shareholders (that is, with stock options) instead of bureaucrats, and the rising curve of executive compensation is explained entirely by the growth of the stock market over the same period. ... So, in other words, it may be that the growth of income inequality is driven by the top 1 percent getting more income from investments. If this is the case, then policies like Social Security and defined-benefit pension plans (pushed by labor unions) are somewhat to blame for this trend not being experienced more widely. Policies that push ownership and investments down the income curve, like stock options for employees and 401(k) plans, may help reduce the problem of income inequality without more government intervention.
A slightly different observation occurred to me as I reviewed the charts Henderson includes in his post; namely, that both CEO pay and income inequality really started rising in the early 1990s:
The Omnibus Budget reconciliation Act of 1993, pushed by President Bill Clinton and passed on a narrow party live vote (remember the chants of "Bye, Bye Marjorie!" as then-Congresswoman Marjorie Margolies-Mezvinsky (D-PA) cast the decisive vote?), and which many observers credit with helping drive the 1994 GOP takeover of Congress, included a provision that capped the corporate tax deduction for executive pay at $1 million. Incentive-based pay was exempted. This bill had the unintended consequence of drastically accelerating the shift in executive pay to stock options.
As noted, correlation is not causation, so it would be unfair to point to the 1993 bill as the root of income inequality. But it suggests an interesting empirical research project: How much of income inequality can be associated with the use of stock options and other equity-based compensation to pay corporate managers?
