Meet the 1%

Earlier this month, employees at the Chicago Board of Trade mocked the Occupy Wall Street protestors by hanging signs in their office windows that read, "WE ARE THE 1%."

It wasn't a wise move, but it highlighted an important point that's been notably absent from the protests: Who, exactly, are these 1% people are protesting against?

One paper I found via The New York Times written by a group of researchers from Williams College, the U.S. Treasury, and Indiana University shows who they are, and how their ranks have changed over the past quarter century. Meet the 1%:

Job

Proportion of Top 1%, 1979

Proportion of Top 1%, 2005

Executives 36% 31%
Medical 17% 16%
Financial professionals 8% 14%
Lawyers 7% 8%
Computer, math, engineering 4% 5%
Not working 5% 4%
Skilled sales 5% 4%
Blue collar 4% 4%
Real estate 2% 3%
Business operations 2% 3%
Entrepreneur 3% 2%
Professor/scientist 1% 2%
Arts, media, sports 2% 2%
Unknown 2% 1%
Government, teacher, social service 1% 1%
Farmer/rancher 2% 1%
Pilots 1% 0.2%

Source: Jobs and Income Growth of Top Earners and the Causes of Changing Income.

Three points should stick out. One, the vast majority of the 1% is not composed of Wall Streeters. They are executives, doctors, and other professionals. Two, financiers' share of the 1% has grown significantly over the past quarter century. Three, the share of all other professions has been fairly stable. But it's this chart, which shows the percentage of total national income captured by each group within the 1% that really highlights how things have changed over the years:

Job

Percentage of Total National Income Captured From Those in Top 1%, 1979

Percentage of Total National Income Captured From Those in Top 1%, 2005

Executives 3.7% 6.4%
Medical 1.3% 1.9%
Financial professionals 0.8% 2.8%
Lawyers 0.6% 1.2%
Computer, math, engineering 0.3% 0.6%
Not working 0.5% 0.7%
Skilled sales 0.3% 0.5%
Blue collar 0.3% 0.5%
Real estate 0.2% 0.6%
Business operations 0.2% 0.5%
Entrepreneur 0.3% 0.5%
Professor/scientist 0.1% 0.2%
Arts, media, sports 0.2% 0.4%
Unknown 0.2% 0.1%
Government, teacher, social service 0.1% 0.1%
Farmer/rancher 0.2% 0.1%
Pilots <0.1% <0.1%

Source: Jobs and Income Growth of Top Earners and the Causes of Changing Income.

Focus on the two groups targeted by the Occupy Wall Street protests: executives and financiers. Financiers' share of total national income has grown nearly fourfold since the late 1970s. Executives' share of the national pot has grown by over 70%.

Let's focus on those executives for a moment. This doesn't negate anything the Occupiers are protesting, but it's interesting to know that very few of the highest paid executives come from Wall Street. According to Forbes, of the top 50 highest paid CEOs last year, just one -- Jefferies' (NYSE: JEF  ) CEO Richard Handler -- hailed from high finance. The top five highest paid executives were Stephen Hemsley from UnitedHealth (NYSE: UNH  ) , Edward Mueller from Qwest Communications, Bob Iger from Disney (NYSE: DIS  ) , George Paz from Express Scripts (Nasdaq: ESRX  ) , and Lew Frankfort of Coach (NYSE: COH  ) . These folks made between $50 million and $100 million last year.

Executive pay has, in general, exploded over the past few decades. According to the Congressional Research Service, average CEO pay was 90 times an average worker's pay in 1994. By 2007, the multiple was 180 times.

Why has it gone up so much? That's the real root of what outrages so many. With some exceptions, CEO pay has surged without a tangible increase in value -- or in many cases, with tangible declines in value. Berkshire Hathaway's (NYSE: BRK-B  ) Warren Buffett elaborated on this growing trend in his 2005 letter to shareholders:

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO -- aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo -- all too often receives gobs of money from an ill-designed compensation arrangement.

Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of Stagnant, receives a bundle of these -- let’s say enough to give him an option on 1% of the company -- his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to repurchase stock.

Let’s assume that under Fred’s leadership Stagnant lives up to its name. In each of the ten years after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated 158% by the end of the option period. That’s because repurchases would reduce the number of shares to 38.7 million by that time, and earnings per share would thereby increase to $25.80. Simply by withholding earnings from owners, Fred gets very rich, making a cool $158 million, despite the business itself improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant’s earnings had declined by 20% during the 10-year period.

Fred can also get a splendid result for himself by paying no dividends and deploying the earnings he withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically -- with Stagnant’s p/e ratio remaining unchanged at ten -- Fred’s option will deliver him $63 million. Meanwhile, his shareholders will wonder what happened to the “alignment of interests" that was supposed to occur when Fred was issued options.

Earning a kingly sum in America is still looked upon highly, if that pay is attached to doing something great. I haven't heard anyone in the Occupy movement complain about the fortune Mark Zuckerberg has made from Facebook. He's changed the way people live, and most feel he deserves every penny. But that's hardly the case for so many executives. The heart of what people are outraged over isn't wealth inequality; It's wealth inequality that is perceived as being undeserved, unearned, or in many cases, earned by those responsible for the economy's deepest problems. "The corporate executives who helped bring on the recession of the past three years -- whose contribution to our society, and to their own companies, has been massively negative -- went on to receive large bonuses," wrote economist Joseph Stiglitz earlier this year.

Same goes for the finance sector. From the late 1940s until around the late 1970s, the average financial worker earned about the same as an average worker from all other industries. Then, it split:

Source: Bureau of Economic Analysis, author's calculations.

Here, too, the fact that financiers earn more than most other workers isn't what aggravates people. It's that they earn more by doing things that are perceived to come at the cost of everyone else, and a feeling that the fuel for those higher earnings isn't ingenuity, but a pile of undeserved benefits -- a gracious Federal Reserve, a platoon of lobbyists, and, of course, bailouts. As former Fed chairman Paul Volcker quipped, the only significant invention to come out of the finance sector in recent decades is the ATM machine. Yet the collateral damage caused by the industry is almost endless: financial crises, deeper recessions, asset bubbles, it goes on and on.

What are your thoughts on the 1%? Sound off in the comment section below.

Fool contributor Morgan Housel owns shares of Berkshire. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of UnitedHealth Group, Berkshire Hathaway, and Coach. Motley Fool newsletter services have recommended buying shares of UnitedHealth Group, Berkshire Hathaway, Walt Disney, and Coach. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (21) | Recommend This Article (37)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 19, 2011, at 4:51 PM, nrgeeone wrote:

    I believe there is an important segment of the population which should be included in the 1%: The "employees" of state legislatures, Congress in its entirety, pseudo "Quasi-Public entities and most importantly: every person connected to any "income stream" emanating from any budget, be it local, municipal, state or Federal governmental body.

    If the majority of folks in these categories simply did the right thing, we wouldn't have a deficit! There is simply ZERO accountability in goverment and big business today. That is what's so damn frustrating!

  • Report this Comment On October 19, 2011, at 9:24 PM, jc09058 wrote:

    Back in 1985, a comment was made then that anyone who could not live on $100,000 year was doing some seriously wrong financially. Today in 2011, I still agree with that statement and wish to add that those people are overpaid and over-compensated are more destroyers of shareholder wealth. I wonder how many more people could be employed at any company where CEOs are paid directly and/or through compensation over $10 million a year. I have to ask why an over paid CEO is worth more than the potential 500 additional employees would be for the same amount of money. it would seem statistically speaking that the potential for better ideas would from a pool of 500 people rather than one single person.

  • Report this Comment On October 20, 2011, at 1:28 AM, sliderw wrote:

    Thanks for the illuminating article, for quantifying why people are upset about Wall Street.

    To be fair, the ATM cannot be the only significant invention of late in the financial sector. For example, it has made investments more accessible to the masses (e.g. mutual funds, ETFs), although their overall costs can be lower still.

  • Report this Comment On October 20, 2011, at 8:34 AM, DDHv wrote:

    We are living fine on less than $30,000 per year.

    Most people seem to pour their income into bags with holes in them.

  • Report this Comment On October 20, 2011, at 9:31 AM, Bert31 wrote:

    I think its important to point out income mobility in the U.S. whenver we talk about the richest or the poorest, for these are not static stations in life that we are born in to and die in. We do not have a caste system that we are unable to improve our stations in life simply for the family that we are born in to, and being born in to a wealthy family does not mean we are garunteed to die wealthy. What also shoudl be pointed out is that equal opportunity does not equate to equal outcomes, and that what you put into improving your own position rather than focusing on what others are doing is usually the better way to imrpove your station.

  • Report this Comment On October 20, 2011, at 9:42 AM, TMFHousel wrote:

    <<We do not have a caste system that we are unable to improve our stations in life simply for the family that we are born in to, and being born in to a wealthy family does not mean we are garunteed to die wealthy>>

    Not static, but US has one of the lowest rates of income mobility among developed nations.

    "In a survey of 27 nations conducted from 1998 to 2001, the country where the highest proportion agreed with the statement "people are rewarded for intelligence and skill" was, of course, the United States. (69 percent). But when it comes to real as opposed to imagined social mobility, surveys find less in the United States than in much of (what we consider) the class-bound Old World. France, Germany, Sweden, Denmark, Spain -- not to mention some newer nations like Canada and Australia -- are all places where your chances of rising from the bottom are better than they are in the land of Horatio Alger's Ragged Dick."

    http://www.slate.com/articles/news_and_politics/the_great_di...

  • Report this Comment On October 20, 2011, at 9:54 AM, Bert31 wrote:

    From a 2007 Treasury Dept. study:

    "There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period as over half of taxpayers moved to a different income quintile over this period.

    Roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005.

    Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period."

  • Report this Comment On October 20, 2011, at 9:55 AM, Bert31 wrote:

    Also

    "Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups."

  • Report this Comment On October 20, 2011, at 11:20 AM, MyPortfolioGuide wrote:

    Has anyone seen this reply with regard to OWS?

    Obama is supporting the Occupy Wall Street 99% anarchist group:

    http://www.businessinsider.com/white-house-draws-closer-to-o...

    I am a millionaire, but I never held a real job in my life.

    I went to Harvard and Columbia.

    I have one of the biggest private jets htat takes me wherever I want.

    My wife wears $44,000 diamond bracelets.

    I play golf every weekend and stay at the most expensive resorts.

    Goldman Sachs gives me millions of dollars.

    When retired I'll get paid millions $ in speaking fees by big companies.

    I'll make millions more as board member of the corps you are protesting.

    MY NAME IS BARACK OBAMA. I AM THE 1%.

  • Report this Comment On October 20, 2011, at 1:39 PM, WikiCPA wrote:

    -Myportfolioguide

    Damn...I was going to say I want to be like you when i grow up! but then the last line ruined it for me.

    "Today in 2011, I still agree with that statement and wish to add that those people are overpaid and over-compensated are more destroyers of shareholder wealth. I wonder how many more people could be employed at any company where CEOs are paid directly and/or through compensation over $10 million a year. I have to ask why an over paid CEO is worth more than the potential 500 additional employees would be for the same amount of money."

    Those 500 employees have one single duty, they were employed to do one task. A CEO is definitely not hired to do one task. The skills and ability to lead a company differ greatly than those 500. One of those 500 are in a good spot to make it to exec, but obviously it takes more than hard work (talent, passion, connections, personality, and style). Like an investment, think of the risk on both sides. The company wants to pay the CEO handsomely to make sure he/she does what they were hired to do. If the CEO were to have a huge negative quarter, the whole world knows it, they'll never be in the industry again. An analyst can forget a comma in a formula and get chewed out, but he won't get fired or barred from working at other firm's. And the warm heat you'll have in your home this winter, probably stemmed from a coal company project financed by big banks. Also, the clothes to keep your family warm, probably started up with bank financing. Getting your computer over to the united states, freight company funded by big bank most likely. I'm sure those companies are thankful for those CEOs who allowed them an opportunity to provide for society, why can't you?

  • Report this Comment On October 20, 2011, at 4:13 PM, RickRickert4MVP wrote:

    "If the CEO were to have a huge negative quarter, the whole world knows it, they'll never be in the industry again. "

    Really? What CEO has lost his/her job after a bad quarter? Dan Hesse at Sprint is still the CEO.... Does RIMM still have the same CEO after their great run? Dean Food's has been on a steady slide since 2007, but that CEO is still there. But if the CEO does get fired, they'll leave with a huge severance package. I'm not saying that the CEO isn't important, I'm just saying that they aren't $50M important.

  • Report this Comment On October 20, 2011, at 4:17 PM, MonkeyFish912 wrote:

    "As former Fed chairman Paul Volcker quipped, the only significant invention to come out of the finance sector in recent decades is the ATM machine."

    He's giving the finance sector far too much credit. The ATM machine comes courtesy of the "Computer, math, engineering" sector.

  • Report this Comment On October 20, 2011, at 4:30 PM, Bmayo27 wrote:

    Peter Lynch was already concerned about the quickly spreading income-gap between CEOs and average-Joes, in his book, "One Up on Wall-Street."

    That was 1990; and, I'm sure people were worried about that widening income-gap WAY before then.

    It needs to be addressed in a adult way. I'm all for people making good returns on money. But, there is becoming a loss of fairness.

    Hell, a rule like, "Your CEO can not earn more than 300 X's your lowest paid Salaried worker." That means, if you've got people making $40,000; the CEO could earn a cool $12,000,000. Surely no one would object to that rule?

  • Report this Comment On October 20, 2011, at 5:55 PM, mph2011 wrote:

    I'd like to see this article written using more recent data. 2005 is a long time ago.

    I think it's also a valid point to see where Federal Congressional and state legislature employees within their own category fit into this mix. I'm certain most teachers social service workers don't make nearly as much as the other part of the group in which they have been categorized - Government, teacher, social service. It's almost laughable if it wasn't so sad.

  • Report this Comment On October 20, 2011, at 7:28 PM, TMFCop wrote:

    So what it says to me is OWS doesn't know what the hell it's protesting then.

    Rather than something concrete, they're looking to topple caricatures. The evil Wall Street bankers. The fat cats. But as was pointed out they're not the only ones occupying the top pay echelons.

    And even the income disparity that has occurred on Wall Street isn't evil by itself, but it's come about because of the government involvement in the financial sector. Yes, the government has always been involved, but it's so closely intertwined with it now they're almost indistinguishable from each other.

    And that's why we saw Wall Street get bailed out at the expense of the taxpayer. And the auto industry. And the myriad of others up and down the income strata suckling at the taxpayers teat.

    OccupyWallStreet is a protest of envy and jealousy. They're not protesting the bailouts per se -- that was the Tea Party -- OWS just wants its part of the pie too. Free education! No student loans! Free healthcare!

    They're mostly a bunch of pie-in-the-sky people simply looking for their own handout. Bah! A pox on them.

    Give me a group of people waving the Gadsden flag!

    Rich

  • Report this Comment On October 20, 2011, at 10:11 PM, TMFHousel wrote:

    "Rather than something concrete, they're looking to topple caricatures."

    "They're mostly a bunch of pie-in-the-sky people simply looking for their own handout."

    Mmm-hmm :)

  • Report this Comment On October 21, 2011, at 9:49 AM, VoiceintheCrowd wrote:

    BMayo27: The problem with that system is that it puts an enormous premium on working at firms that provide very few jobs but have high revenue per employee. Google's CEO could make a killing in your system; McDonalds' and Wal-Mart's CEOs could not, because their business models involve millions of blue-collar workers rather than mere thousands of white-collar ones.

  • Report this Comment On October 21, 2011, at 1:12 PM, kahunamoore wrote:

    The 1% isn't just about *income* - try doing the analysis for assets (ownership, control) instead and see what the charts look like.

    The rich can afford to pull back investments in a down market and live off the income from "parked" assets. Loopholes that protect these same assets (and income) from taxation are the problem. The control over government policy/contracts in favor of the 1% is the problem.

    I don't give a hoot about their income, that is just the tip of the iceberg that this titanic country is approaching.

    If the 1% want to hold onto, and indeed want to preserve the value of their held assets, they should invest *now* so that an implosion of the economy won't wipe out everything the own. Early course correction is wise.

    Or maybe the 1% should just keep doing what they are doing and let the system fail. The 99% will be happy to pick up the pieces... beats the bajezus out of "trickle down" :-)

  • Report this Comment On October 27, 2011, at 11:51 PM, gsm425 wrote:

    The article that TMFHousel cites in the comment above from Slate is misleading. It cites a OECD survey about the effects of education on wealth. The data on intergenerational mobility does put the US toward the bottom of OECD nations but the correlation is still less than 0.5, meaning parental wealth predicts less than 50% of a persons wealth later in life. It is also telling that the data in the OECD report mostly covers Europe, not the US (see the footnotes). Most of the charts do not include the US.

    It is becoming more clear that education, the focus of the OECD study, is largely a waste of money. College debt and lost years of income are causing long term wealth creation problems for the young in ways they did not in past generations.

  • Report this Comment On October 31, 2011, at 6:23 PM, CHill8008 wrote:

    WE are [likely] the 1%. To be in the 1% of world earners you only have to make in the mid $30,000's. I don't think these idiots know how good they've got it, how little it really takes to survive. And the upper level earners fund the fed gov with income tax, something those in the lower half, or close to it, don't do.

  • Report this Comment On November 18, 2011, at 10:55 AM, Bmayo27 wrote:

    Kudos VoiceintheCrowd! Great point!, I still think something better could be figured-out.

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