Robert Reich's CEO Pay Chart Is Wrong. Here's the Real Math.

The former U.S. labor secretary presents economic data in deceptive ways.

By Aaron Brown of Reason. 

"Robert Reich, an emeritus professor at the University of California, Berkeley, and a former U.S. labor secretary, makes popular economics videos arguing that the U.S. economy is rigged against workers.

One of his recent pieces caught my eye because it makes heavy use of numbers and charts. The video is a great example of how to misuse economic data to support a preconceived narrative—in this case, a fairy-tale account of evil CEOs stealing wealth from their employees.

At the outset of the video, Reich presents a chart showing that in 2024 the "typical worker" earned $36.49 per hour, while CEOs made—"ready for this?" Reich asks viewers—$431.80!

There are lots of problems with this chart, starting with the fact that it's labeled "CEO Salaries," but that's not what the $431.80 figure represents. Though he rarely sources his work, Reich's chart matches data from a report by the Economic Policy Institute (EPI), which measures what the leaders of the largest 350 public corporations in America earn, not all CEOs.

There are about 4,000 publicly traded corporations headquartered in the U.S., and even more privately held companies. They all have CEOs. Reich has cherry-picked the wealthiest and most successful faces in the crowd. This is like measuring what the highest-paid actors earn, setting aside all the struggling performers waiting tables, and claiming that acting is the world's most lucrative profession.

If you broaden the lens to include CEOs at ordinary-sized companies, Bureau of Labor Statistics (BLS) data show their pay looks a lot like that of other professionals: Median CEOs make about $200,000 a year, and their pay is growing at about the same pace as everyone else's.

Another problem is that the $431.80 is compensation realized in 2024. Most of it came from stock options granted for performance in previous years. In the prior five years, stock prices had roughly doubled, allowing CEOs to cash in compensation from past years. It's a lot of money, but perhaps not out of proportion to five years of service steering the world's largest and most successful businesses through the pandemic and doubling shareholder wealth. And only the CEOs who survived the turmoil and delivered the doublings were around to collect it. In a down year for the stock market, you might see compensation drop by 80 percent.

The CEOs of the largest American companies have seen their compensation grow at an extraordinary pace, but that's because the businesses they run have grown so large. A highly regarded paper by economists Xavier Gabaix and Augustin Landier, "Why Has CEO Pay Increased So Much?" showed that CEO compensation should scale with firm size, and that this effect explains the entire rise in CEO pay.

Today, Nvidia's market cap alone is more than two and a half times the entire S&P 500's market cap when it was created in 1957, adjusted for inflation. Comparing CEO pay at the largest firms in 1968 vs. what they make today is like equating the director of a late-night commercial for a personal injury law firm to the director of a Hollywood blockbuster. Nvidia CEO Jensen Huang impacts more economic value in an afternoon in 2026 than James Roche did as the CEO of General Motors in all of 1968.

The same compensation explosion has occurred across every winner-take-all field, affecting top athletes, movie stars, and best-selling authors. The highest NBA salary in 1968 was Wilt Chamberlain's $250,000-a-year deal with the Lakers, and the team also agreed to cover his taxes. Chamberlain's salary alone works out to roughly $2.2 million in today's dollars. Compare that to Steph Curry's record-setting $62.6 million pay package in the upcoming NBA season.

Yet Reich claims that "the system is rigged." Is the NBA also rigged in favor of Curry? Against whom?

Reich has more evidence that the economy is rigged against workers. He presents another chart showing, in his words, that "big corporations chronically underpay workers compared to the workers' productivity on the job. Productivity, that is, the value of their output, has soared and resulted in record corporate profits."

The source of Reich's chart, which shows the productivity-pay gap, was once again the EPI, which compares workers' earnings over time to the productivity of the U.S. economy.

The measure they used for worker pay doesn't include all employees. It's just "nonsupervisory workers," so it excludes management. The EPI says that it uses this dataset because it represents "the typical worker," or "roughly 80% of the U.S. workforce." The purpose of the chart, they explain, is to answer "a crucial question: Do typical workers in the United States share in the benefits of economic growth?"

The problem is that the EPI is drawing on an untrustworthy dataset. In 2005, the BLS published a note in the Federal Register repudiating its measure of nonsupervisory workers' earnings, stating that it had "limited value."

The agency also noted that the distinction between a "supervisory" and "nonsupervisory worker" was "not meaningful to survey respondents" and "that it is not possible to tabulate their payroll records" to reflect this distinction.

In 2003, Patricia Getz, who was in charge of employment statistics at the BLS, noted that "records are not kept for these groupings of workers," so employers weren't filling out this portion of the survey.

And this series only counts regular paychecks. Bonuses, profit sharing, and stock grants, which represent how a growing share of American workers are paid over the exact period this chart covers, are excluded entirely. 

The BLS sought to discontinue this data series altogether in favor of the all-employee series. In the end, it continued to collect and publish data on nonsupervisory workers, but the poor data quality renders this chart essentially worthless.

The wage measure favored by the BLS tracks compensation for all employees at all levels, not only because this is a more trustworthy dataset, but on the logical assumption that a company's gains in productivity reflect the combined efforts of all employees, including its officers and supervisors.

Reich also cites gross productivity before depreciation. Consider an Uber driver whose passengers pay $85,000 over a year, of which $30,000 goes toward expenses such as gas, insurance, and fees. The driver's gross productivity is $55,000. But her car might have depreciated $15,000, so the net productivity is $40,000. That $15,000 wasn't stolen from her paycheck by a greedy CEO; it's a true loss in economic value.

This matters because over the period Reich discusses, corporate assets shifted from slow-depreciation assets such as steel mills to faster-depreciating assets such as computers and software. Depreciation has risen from 12 percent of national income to 17 percent. Reich is counting that 5 percent difference as stolen from workers, but in fact, it disappeared.

Regardless, if we use the data favored by the BLS and compare all worker compensation to productivity, the divergence between pay and productivity disappears.

Reich's theory that workers are getting shafted has a third component: He claims that CEOs are "siphoning" profits into stock buybacks to boost their own compensation.

"Stock buybacks," he claims, "reduce the number of shares available for investors to purchase, which drives up the value of the remaining shares. Just simple supply and demand."

This is an elementary accounting error. Take a $10 billion market-cap company with 100 million shares trading at $100 each. It decides to do a 10 percent buyback, spending $1 billion to buy 10 million shares for $100 each. The $1 billion cash it spends makes it a $9 billion company. It now has 90 million shares outstanding. The stock price is the same $100 per share outstanding.

Of course, in real life, things are not so neat. Investors tend to take a buyback announcement as good news; the insiders think the stock is undervalued, and bid the price up a few percent. There are other cases where investors take the opposite view: The buyback is a sign the company has no better use of its cash and is fading. But the point is it's not "simple supply and demand"; it's a signal that might or might not help the stock price.

Moreover, Reich misunderstands the purpose of a stock buyback. Companies have two ways of transferring profits to their shareholders: They can pay a dividend or they can do a buyback. The economic effect is the same.

Reich sees buybacks as a way of diverting profits to themselves rather than sharing them with their workers. "Corporations and their CEOs are instead siphoning them off into stock buybacks," he says.

They're not "siphoning" money. They're paying out profits to their owners. All investors, even greedy ones, are entitled to a share of the earnings of the companies they own. That's the deal. And without it, nobody would invest in the first place.

"Stock buybacks used to be considered illegal stock manipulation until Ronald Reagan came along," Reich says. "CEOs can now effectively give themselves a raise while workers get the shaft."

Stock buybacks were never "considered illegal stock manipulation." In 1982, the SEC clarified a gray area, simplifying the legal treatment of stock buybacks and making it easier for companies to use them as an alternative to paying dividends.

Reich claims that stock buybacks are worse than paying dividends because they're a way for CEOs to enrich themselves. "These rising share prices bump up CEO pay because increasingly part of their compensation is in shares of stock," he says.

The problem with this theory is that boards of directors, not CEOs, decide whether to pursue stock buybacks. These are the same directors who negotiate CEO compensation. Buybacks are an item on the negotiation checklist, like benefits and contract length, not something CEOs sneak in afterward to inflate their earnings.

What's the evidence on how buybacks affect CEO compensation? A study in the Journal of Accounting and Economics found the relationship between buybacks and CEO compensation was spurious. Research by a compensation consulting firm that examined S&P 500 buybacks from 2018 to 2021 found the same picture from inside the boardroom: Pay packages rest on multiple performance metrics, and the companies making the largest buybacks adjust their incentive targets to cancel out the share-count effect.

So what does Reich conclude from all of this misinformation and misconceived data? That we need a slew of policies to rein in American capitalism. He says we should "raise the federal minimum wage," "strengthen labor unions," "use antitrust laws to break up big corporate monopolies," "raise taxes on corporations," and "ban stock buybacks."

Apart from his misinformed discussion of stock buybacks, Reich doesn't address those issues in his video. Instead, all he's done is cherry-pick the compensation of the top CEOs in America and use a faulty data series to claim the economy is rigged against workers.

The charts and numbers we use to argue about important questions in public life are too often presented in deceptive ways. It doesn't get much more deceptive than this video."

Why CEOs Get Paid So Much

Doug McMillon’s success at Walmart shows the value of corporate leadership

WSJ editorial. Excerpts:

"Mr. McMillon pressed the company to grow its own e-commerce capability, which now competes well with Amazon and the rest. He has also been among business leaders who have integrated AI into its store management and other operations to increase productivity—and profitability. Walmart, which imports a huge share of its products, has managed the Trump tariff shock about as well as any company.

One of the hardest tasks in business is to inherit a giant business and continue to grow. Corporate history is full of once-famous business names that failed to adapt. General Electric is the classic tale of rise and fall, but in retail so are Sears, Kmart and many others. Success in business, unlike in government, is a constant struggle tested in a competitive marketplace.

Mr. McMillon’s efforts have paid off for shareholders and workers. Walmart’s annual revenue has grown on his watch from nearly $486 billion to $681 billion in its latest fiscal year. Walmart’s shares have risen some 310% in his tenure, while the company has increased wages and benefits for Walmart’s 2.1 million employees."

 

Why Top CEOs Earn Big Paychecks

From Alex Tabarrok.

"CEO compensation at large firms is high, especially in comparison to average worker wages, sparking debates over income inequality. Critics argue that such pay packages are unfair and disproportionate to actual company performance. Proponents contend that high pay reflects productivity and is necessary to attract scarce top talent to large firms. Let’s go to the ticker tape.

On August 12 shares of Starbucks were selling for about $77, a level they had been stable at for some time. On August 13, shares were selling for $94. What changed? On August 13, Starbucks announced that they were hiring a new CEO, Brian Niccol, who had held the top position at Chipotle.

There are some 1,132,800,000 Starbucks share outstanding so hiring Niccol instantly increased the value of Starbucks by just over $19 billion. In comparison, Niccol will be paid $1.6 million in salary, a bonus payment of $10 million and potential equity incentives that could be worth on the order of $100 million  or more if the stock continues to do well.

No question, Niccol is paid handsomely but it’s only a small percentage of the billions the market estimates he will create for other people, both consumers and investors.

Niccol has had a phenomenal streak as CEO of Chipotle raising the stock price from about $6 to $56. Thus, it wasn’t surprising that on the announcement of his move, Chipotle stock plunged from $56 to $46 (later recovering to around $52).

Using the latter number, the value of Chipotle fell by about $5.5 billion on the day of the Niccol announcement. That’s a remarkable fall given that the number two at Chipotle is probably no slouch. But heh, Kevin Durant doesn’t make quite as much as Steph Curry. (See yesterday’s post on the benefits of inequality!) Last year, Chipotle paid Niccol a total compensation package worth about $22.5 million. Again, a nice pay package but is there any question that Chipotle investors are sorry to see Niccol go?

Note also that the market expects Niccol to raise the value of Starbucks going forward more than he would have raised the value of Chipotle going forward so this move was a net gain for society. It’s important to remember that CEO pay is not just about incentives it’s about allocation.

Bottom line is that in the estimation of people who put their money where there mouth is, Niccol is worth the pay.

Addendum: Don’t forget my previous post in this series from 2013, The Value of a CEO looking at what happened when Ballmer exited Microsoft. Same basic lesson but in reverse! N.B. look at what has happened to Microsoft stock since!

All of this should also be put in the context of the Extreme Shortage of High-IQ Workers which one can also understand as the shortage of talent."

The Wrong Way to Target Corporate Excess

Stock buybacks and lavish executive pay make easy targets for raising more tax revenue, but some proposals to curb them would create more problems than they solve

By Spencer Jakab of The WSJ. Excerpts:

"One proposal is an excise tax on companies that buy back a “significant” amount of their own stock."

"Stock buybacks are a sorely misunderstood punching bag. Uncommon before a rule change in 1982, they have exploded over the last couple of decades to overtake dividends as the most common way companies return money to shareholders. Companies in the S&P 500 paid out $178 billion via buybacks in the first quarter of this year. Analysts at DataTrek Research believe they could top $1 trillion in the next 12 months. In the last decade, Apple Inc. alone has bought back $442 billion of its shares and three other American companies have repurchased more than $100 billion apiece, according to S&P Global.

But a lot of criticism has been heaped on buybacks from people who get the most basic things wrong about them. For example, an incendiary article in a major magazine commenting on Apple becoming the first trillion dollar company in 2018 called the achievement a “scam” achieved through buybacks rather than great products like the iPhone. The writer, whose thesis was repeated elsewhere, got his math backward. Buybacks reduce the number of shares as they boost earnings per share. While this often helps to boost the share price, the same can’t be said for total market capitalization. Apple might have reached the $1 trillion milestone sooner by instead hoarding cash. Meanwhile, pension and retirement accounts that hold the shares were the overwhelming beneficiaries of those buybacks, not executives.

And, in a critique of the corporate tax cuts passed during the Trump administration, Americans for Tax Fairness pointed out that much of the windfall was used for buybacks and that they “mostly enrich the already wealthy, including CEOs, because rich people own most corporate stock.” Well, yes, but the same could be said of any dollar of profit earned by a company. The fact that it is used to buy back stock rather than pay down borrowings, invest in a new project or go into the company’s bank account makes no difference to the owner’s wealth.

What does make a difference is if it is misspent. A politician who would never think to tell a local restaurant owner who just had a good year to use the windfall to expand her dining room or keep the money in the bank earnings peanuts instead of giving herself a raise. Using tax policy to sway that sort of a decision by big companies could lead to lousy investments.

Capping executive pay at a certain ratio would raise problems too. Consider two similarly compensated CEOs, Daniel O’Day of Gilead Sciences and James Quincey of Coca-Cola. Mr. O’Day makes 76 times his average employee’s pay while the slightly lower-paid Mr. Quincey makes 1,621 times as much, according to executive compensation tracker Equilar. People who make and distribute soft drinks tend to earn a lot less than scientists so the ratio is skewed, but Mr. Quincey’s company earns more profit. Enforcing pay ratios would send the top executive talent to investment banks, software companies or biotech firms instead of retailers, trucking companies or restaurant chains."

Some new shortcomings of the AFL-CIO’s CEO-to-worker pay ratio

From Mark Perry.

"The AFL-CIO released its annual Executive Paywatch Report this week, based on CEO and worker pay in 2018. Here’s the press release, here’s AFL-CIO Secretary-Treasurer Liz Shuler remarks, and here’s more data. Like in the past, this year’s AFL-CIO’s report is based on some apples-to-oranges comparisons and additional statistical chicanery including:

1. The AFL-CIO reports an increase in the average U.S. rank-and-file worker’s pay over the past 10 years of slightly less than $8,000 or less than $800 per year. It also reports that the average CEO received a $500,000 raise last year compared to the average rank-and-file worker who received barely more than a $1,000 raise, bringing pay in 2018 to $39,888. 

Here’s the math behind those claims:

In 2008, the “Average Hourly Earnings of Production and Nonsupervisory Employees” in the private sector was $18.07 and the average work week for those workers was 34.3 resulting in annual pay of about $32,000 working 52 weeks per year (AFL-CIO’s assumption). In 2017, those workers earned $22.05 per hour and worked 33.7 hours per week for annual income of $38,640. Last year, those workers earned an average of $22.70 per hour, worker 33.7 hours on average and earned about $39,800 for the year, for an increase of about $1,140. Based on the approximate $8,000 difference in average annual income between 2008 and 2018 for rank-and-file workers, that translates to an average annual increase of less than $800. But it’s important to note that those are not full-time workers (35 hours per week or more), but part-time workers, or more accurately a mix of full-time and part-time workers whose average workweek is less than 35 hours per week.

To then compare the average annual pay increase of $800 (cash wages only) for mostly part-time workers to the average increase of $500,000 in total compensation for CEOs over the last decade is a misleading apples-to-oranges comparison. Deceptively, the AFL-CIO sometimes refers to “CEO pay” and other times to “CEO compensation” when comparing those figures to “average U.S. worker’s pay” that it says “highlights the continuing pay inequity between workers and CEOs.” But it’s statistical sleight-of-hand to compare the cash-only wages of mostly part-time workers to the total compensation of CEOs working 50-60 hour weeks, and yet the AFL-CIO makes this oranges-to-apples comparison every year in its Executive Paywatch Reports. 

2. The AFL-CIO changed its methodology this year and is using the new ratios of CEO compensation to median employee compensation for the S&P 500 (and other publicly traded) companies that is now mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. You can view the AFL-CIO’s database of pay ratios for the S&P 500 companies here.

For example, the McDonald’s CEO Steve Easterbrook made $15.876 million last year and the median compensation for a McDonald’s employee was $7,473, resulting in a CEO-to-worker pay ratio of 2,124-to-1. The new required pay ratios compare CEO compensation to the median compensation of employees, so that’s an improvement over the AFL-CIO’s previous comparisons of CEO compensation to the cash wages of employees (excluding fringe benefits), but there’s a new issue. S&P 500 companies like McDonald’s operate globally with workers around the world, and so McDonald’s (and other companies) compares the median compensation for global workers to the compensation of the company’s CEO.

According to McDonald’s most recent proxy statement, it considered all full-time, part-time, seasonal and temporary workers employed on October 1, 2017 in restaurants across the globe and reported that “Our median employee for 2018 (a part time restaurant crew employee located in Hungary) had 2018 total compensation of $7,473.” Similarly, Gap, Inc. has a whopping pay ratio of 3,566-to-1 because its median employee compensation is only $5,831 because it employs a lot of part-time workers globally at its stores in low-wage countries like Mexico, Pakistan, Russia, Philippines, Thailand, India, Ukraine, Peru, etc.

So while the new pay ratios overcome the flaw of comparing employee cash wages to total CEO compensation  the new ratios include the compensation of many workers outside of the US, which will significantly inflate pay ratios by including the compensation of workers in low wage countries around the world working for US-based S&P 500 companies.

3. But here is perhaps the most significant statistical legerdemain employed by the AFL-CIO this year. It takes the reported pay ratios of the S&P 500 companies (available here), which range from a high of 3,566-to-1 for The Gap to a low of 6-to-1 for Copart, Inc., and then calculates the average CEO-to-worker pay ratio of 287-to-1 for 2018 (see chart above). Note that the new 2018 ratio is much lower than the 2017 CEO-to-worker pay ratio of 361-to-1 reported by the AFL-CIO using its old methodology, a decrease of 20.5% in just one year. Overall, the pay ratio decreased significantly because it’s more accurate to: a) do a company-by-company comparison of CEO compensation to the compensation of workers at the same company and b) compare CEO compensation to employee compensation. But that decrease didn’t stop the AFL-CIO’s secretary-treasurer from reporting that:

Not surprisingly, the CEO-to-worker pay ratio remains high: 287 to 1. I’ll repeat that: 287 to 1. Meaning the average CEO earns 287 times what an average employee earns.

Conveniently, no mention of the fact that the pay ratio was 20.5% lower than the previous year.

Most importantly though, it’s always more accurate to use the median than the mean to find a “typical” value in a distribution, especially when  there are outliers on the high end like in this case. Therefore, it would be more accurate to calculate the median pay ratio for the S&P 500 companies instead of the mean pay ratio. And when you do that, the CEO-to-worker pay ratio for 2018 falls to 169-to-1 (see chart above).

Bottom Line: It’s an improvement in the AFL-CIO’s methodology to use the new required company pay ratios based on median employee compensation to calculate its CEO-to-worker pay ratio, but the union federation is still reporting an inflated statistic that now includes global workers and is also based on the flawed use of mean instead of median to calculate the typical pay ratio for the typical worker. For S&P 500 companies last year, the median (typical) CEO-to-worker compensation ratio was only 169-to-1, not the 287-to-1 ratio reported by the AFL-CIO. And as I posted previously:

Q: The average CEO of an S&P 500 company received $14.5 million last year, and as a group those 500 CEOs received about $7.25 billion in total compensation in 2018. If the AFL-CIO could wave a magic wand and confiscate that entire amount and redistribute $7.25 billion to the current 104.3 million rank-and-file workers, how much would each one get?

A: An annual increase in pay of $69.50 for each rank-and-file worker before taxes, or about $1.34 more per week and about only 3 cents per hour. In other words, complete confiscation and redistribution of S&P 500 CEO compensation would make almost no difference for the average rank-and-file worker."

Are top CEOs underpaid?

From Tyler Cowen.

"There is another lesson from the numbers: CEOs are paid less than the value they bring to their companies. More concretely, CEOs capture only about 68–73 percent of the value they bring to their firms. For purposes of comparison, one recent estimate suggests that workers in general are paid no more than 85 percent of their marginal product on average [Isen 2012]; that difference is attributed largely to costs of searching for workers and training them to become valuable contributors. In other words, workers actually seem to be underpaid by somewhat less than CEOs are, at least when both are judged in percentage terms. Both of those are inexact estimates, but in fact these results are what economic reasoning would lead us to expect. It may be easier to bargain the CEO down below his or her marginal product a bit more, given that the talents of the CEO would be worth much less in non-CEO endeavors.

I find the most convincing estimate of the gap between pay and marginal product to be that of Lucian A. Taylor, at the Wharton School of Business. He finds that a typical major CEO captures somewhere between 44 percent and 68 percent of the value he or she brings to the firm, with the additional qualification that the CEO’s contract offers some insurance value—that is, in bad times for the firm the pay of the CEO won’t be cut in proportion, but the CEO shares to a lesser degree on the upside. That 44–68 percent is therefore a better deal for the CEOs than it may appear at first glance. Still, you won’t find credible estimates suggesting that major CEOs, taken as a group, are capturing more than 100 percent of their value added. Here too, that is what you would expect from a competitive bidding process.

Part of the accompanying footnote: For the 68–73 percent estimate, see Nguyen and Nielsen 2014; for the 44–68 percent estimate, see Taylor 2013… It is a little-known fact that the current use of high-powered financial incentives for American CEOs still has not reattained the level it held in the pre–Second World War period.

That is an excerpt from my Big Business: A Love Letter to an American Anti-Hero, due out next week."

It’s that time of year, expect AFL-CIO to produce another hugely inflated CEO-to-worker pay ratio any day, debunked in advance

From Mark Perry.

"

Any day now, the AFL-CIO’s Executive Paywatch division will report another one of its wildly inflated CEO-to-worker pay ratios for 2017 based on a series of flawed statistical assumptions that result in a rather meaningless apples-to-oranges comparison. See my criticisms of the AFL-CIO’s report last year here, here, and here. This year, the Wall Street Journal just published CEO compensation online for all of the S&P 500 companies along with several related articles in today’s print and online editions here, here and here. Therefore, this year I’m able to preempt the AFL-CIO and publish a rebuttal to its anticipated massively inflated 300+ CEO-to-worker pay ratio before its analysis is released, instead of responding to their report after it has gone public and gets widely and blindly reported by the media without anyone (except John Merline of IBD) ever questioning “the statistical legerdemain used to produce it” (see below).
As I have reported many times before, here is a summary of the main flaws in the “methodology” used by the AFL-CIO to produce its wildly inflated 300+ CEO-to-worker pay ratios every year:

• The AFL-CIO uses the mean (average) CEO compensation figure each year, which is always much higher than the more realistic and more typical median CEO compensation. For 2017 data from the Wall Street Journal, the mean compensation for S&P 500 CEOs was $13.5 million, which was 13.4% higher than the more realistic median pay of $11.9 million for the typical CEO (based on the actual full WSJ database, which is slightly different from the $12.1 million reported by the WSJ).
• They compare total CEO compensation (base salary plus all additional forms of compensation including cash bonuses, stock awards, option awards, pension benefits, etc.) for executives in their prime earning years managing the world’s largest corporations to cash-only pay for part-time rank-and-file workers of all ages working for companies of all sizes (including small grocery stores, independent small restaurants, etc.).

The analysis below summarizes my corrections for those statistical flaws above that are used by the AFL-CIO annually to get an exaggerated, inflated CEO-to-worker pay ratio:
In its Executive Paywatch release last year, the AFL-CIO reported that the average nonsupervisory rank-and-file worker earned $37,632 in 2016. To arrive at that figure, the AFL-CIO reports that its methodology is as follows:

The average annual income earned by rank-and-file workers is taken from the U.S. Bureau of Labor Statistics Current Employment Statistics survey. Specifically, it is the average hours and earnings of production and nonsupervisory employees on private nonfarm payrolls. The average weekly pay is multiplied by 52.

Here are more details of how the AFL-CIO will calculate average worker pay this year if it follows its procedure in previous years. It will use an average hourly wage of $22.05 for production and nonsupervisory workers in 2017 (BLS data here) and an average workweek of only 33.7 hours (BLS data here) for the average rank-and-file worker. Assuming 52 weeks of work per year: $22.05 per hour x 33.7 hours per week x 52 weeks ≈ $38,640 average annual cash-only earnings for the typical part-time worker in 2017. Conveniently, the fringe benefits that all rank-and-file workers, even part-time workers, receive as part of their total compensation are mysteriously not considered by the AFL-CIO.
Therefore, the AFL-CIO engages in some questionable statistical chicanery by sloppily reporting an apples-to-oranges comparison of: a) total CEO compensation for only about 500 CEOs working full-time in their prime earning years to b) the cash wages only for 1o2.5 million rank-and-file workers of all ages working for companies of all sizes, who work an average of less than 34 hours per week, and are therefore working part-time, not full-time, on average. But you would never know that from the AFL-CIO’s website because the average hourly pay and average hourly workweek of rank-and-file workers are never reported, and I guess nobody has ever bothered to check to find out that the AFL-CIO is using average annual cash-only income (excluding fringe benefits) for a mix of full-time and part-time employees whose average workweek was only 33.7 hours last year.
For 2017, the CEO-to-worker pay using the AFL-CIO’s methodology would be about 349-to-1 ($13,472,000 ÷ $38,640) comparing average CEO compensation to cash wages for part-time workers, see top chart above.
Questions: a) How would the AFL-CIO’s CEO-to-worker pay ratio change if we: a) calculate average worker pay for full-time workers, b) compare the average pay for a rank-and-file worker who works the same number of hours that a typical CEO works, e.g., 50 or 60 hours per week, c) compare total compensation of both CEOs and rank-and-file workers working full-time including fringe benefits for the rank-and-file, d) use median instead of average CEO compensation, and e) consider only those workers who are employed by companies with 500 or more workers to consider the workers most likely to actually work for an S&P 500 company? The charts above summarizes how the CEO-to-worker pay ratio would change, here are the details:
1. Correcting for the AFL-CIO’s Statistical Shortcomings/Legerdemain
a. Using median CEO compensation in 2017 of $11,900,000 would lower the CEO-to-worker pay from 349-to-1 to 308-to-1, a reduction in the ratio of nearly 12% (see bottom chart above).
b. Assuming a 40-hour workweek for full-time rank-and-file workers employed by companies with 500 or more workers, who received average hourly compensation of $36.65 last year including fringe benefits (BLS data here), and annual total compensation of $73,300, we would get CEO-to-worker compensation ratios of 177-to-1 using average CEO compensation and 156-to-1 using median CEO compensation. In other words, the AFL-CIO’s CEO-to-worker pay ratio is conveniently inflated by a factor of 2X by using cash wages only for part-time workers! Talk about bogus statistical chicanery! And year after year, the media never questions the AFL-CIO’s totally flawed methodology and parrots the inflated and wildly exaggerated CEO-to-worker pay ratios.
c. Since no S&P 500 CEO works only 40 hours per week, let’s assume a 50-hour workweek for full-time rank-and-file workers to make a more realistic comparison, and use hourly compensation of $36.65 like above and annual total compensation of $95,290 for workers employed by companies with 500 or more employees. That would result in CEO-to-worker compensation ratios of 141-to-1 (average CEO pay) and 125-to-1 (median CEO pay), see charts above.
d. To make it an even more realistic comparison to the average workweek of an S&P 500 CEO, let’s assume a 60-hour workweek for full-time rank-and-file workers and annual total compensation of $114,348 we would get CEO-to-worker compensation ratios of 118-to-1 and 104-to-1 for average and median CEO pay respectively.

Conclusion: By considering both total compensation (including fringe benefits) for both CEOs (and using median CEO pay) and rank-and-file workers, and by considering longer workweeks for rank-and-file workers that would be more comparable to the average hours worked by a CEO of a major multi-national corporation in the S&P 500, we can get a more accurate apples-to-apples comparison. Those more accurate comparisons result in CEO-to-worker compensation ratios of between 177-to-1 (for rank-and-file workers averaging 40-hour workweeks vs. average CEO pay, see top chart) to as low as 104-to-1 for rank-and-file workers putting in 60-hour weeks that might be the most comparable to the average workweek of a top CEO and using median CEO pay.
Let’s keep this analysis in mind in the coming weeks when the AFL-CIO’s reports something like another 350-to-1 CEO-to-worker pay ratio that will generate sensationalized media coverage even though it is hugely exaggerated by a factor of at least 2X and probably more realistically inflated by an AFL-CIO-to-reality ratio of 3.5-to-1!
2. Confiscation and Redistribution of CEO Pay. And what’s the whole point of the AFL-CIO’s annual reports on wildly inflated CEO-to-worker pay ratio? The sub-title of last year’s AFL-CIO’s Executive Paywatch report pretty much sums it up: “More for Them, Less for Us.”
The AFL-CIO’s message seems to be that if CEOs weren’t being so generously over-compensated, then the rank-and-file workers would be doing much better and making higher wages. For example, according to the AFL-CIO in 2015:

America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while workers’ wages have stagnated.

The AFL-CIO has fallen here hook, line and sinker for the zero-sum, fixed pie fallacy, one of the most common economic mistakes that falsely assumes that there’s a static fixed pie and therefore one party can gain (get a bigger slice) only at the expense of another (who’s left with a smaller slice). But let’s assume that there is a “fixed pie of wages” and do some confiscation and redistribution of CEO compensation to see how that would affect average rank-and-file worker pay.
Q: If the CEOs of the S&P 500 companies received $13.47 million on average last year, then as a group, those 503 CEOs in the WSJ database received about $6.77 billion in total compensation in 2017. If the AFL-CIO could wave a magic wand and confiscate that entire amount and redistribute $6.77 billion to the current 103,457,000 rank-and-file workers, what would each one get?
A: An annual increase in pay of about $66 for each rank-and-file worker before taxes, or about $1.27 more per week and only 3.2 cents per hour. In other words, complete confiscation and redistribution of S&P 500 CEO compensation would make almost no difference for the average rank-and-file worker.
Bottom Line: The AFL-CIO can only get a distorted and wildly inflated CEO-to-worker pay ratio of something like 350-to-1 every year with a flawed apples-to-oranges analysis that compares the total annual compensation of a small, select group of CEOs in their prime earning years heading America’s largest multi-national corporations, who probably typically work 50-60 hours per week or more, to the average annual cash wages of part-time rank-and-file employees who work less than 34 hours per week on average. Once we make a more statistically valid apples-to-apples comparison, the CEO-to-worker compensation ratio falls by 50% from the AFL-CIO’s expected 350-to-1 ratio to 177-to-1 once we consider total compensation for both CEOs and full-time (40 hours per week) rank-and-file workers employed by companies with 500 or more workers. If we assume a 60-hour work week for the average worker (to be comparable to the workweek of an average CEO), the CEO-to-worker compensation ratio falls by two-thirds to only 118-to-1 for average CEO pay and 104-to-1 for median CEO pay. Further, even if we could confiscate 100% of the compensation of all S&P 500 CEOs, the typical rank-and-file worker would probably get about $1 per week in additional after-tax earnings. Big deal.
Just like last year, the CEO-to-worker pay ratio reported by the AFL-CIO gets my annual “Biggest Blindly Accepted Statistical Fairy Tale of the Year Award.” Well no, it’s actually a tie with the gender wage gap myth and the incessantly repeated “77 cents on the dollar” statistical falsehood. What’s disappointing is that much of the mainstream media seem to blindly accept both of these statistical falsehoods without ever challenging the “statistical legerdemain” that are used to produce and perpetuate these statistical myths. One exception was this excellent article in 2015 by Investor’s Business Daily’s John Merline, (“Do CEOs Make 300 Times What Workers Get? Not Even Close“) who concluded:

What’s not understandable is why the mainstream press keeps repeating the massively inflated 300-to-1 number without noting the statistical legerdemain that produced it."

More on the statistical chicanery of the AFL-CIO’s artificially inflated CEO-to-worker pay ratio

From Mark Perry.

"The Wall Street Journal reported today on its front page that “The median pay for CEOs of the biggest U.S. companies was $11.7 million in 2016, up from $10.8 million in 2015 and a postrecession record, according to a Wall Street Journal analysis of S&P 500 firms.”

According to the AFL-CIO’s annual report on CEO pay released in May: “In 2016, CEOs of S&P 500 Index companies received, on average, $13.1 million in total compensation, according to the AFL-CIO’s analysis of available data.” Last year, the AFL-CIO reported that “the average CEO of an S&P 500 company made $12.4 million per year in 2015.”

I’ve previously documented the statistical chicanery and legerdemain employed by the AFL-CIO to exaggerate and inflate its “CEO-to-Worker Pay” ratio (see CD posts here and here) that includes:

1. Using a small sample of the highest paid CEOs in America, the AFL-CIO compares the total annual compensation of about 400 S&P 500 CEOs to the average annual pay of about 100 million rank-and-file workers, most of whom don’t work for S&P 500 companies. A more accurate comparison would be of S&P 500 CEO compensation to the average pay of employees of those same companies.

2. Comparing the total compensation of CEOs in the S&P500 (including all fringe benefits) to the cash-only wages of rank-and-file workers (excluding all fringe benefits), resulting in a distorted apples-to-oranges comparison. To be fair, the AFL-CIO should either: a) include fringe benefits for both CEOs and rank-and-file workers or b) exclude fringe benefits and compare only cash compensation.

3. Comparing the total compensation of CEOs who are working full-time and likely putting in 50-60 hour workweeks managing large multi-national corporation to the cash-only income of rank-and-file workers whose average workweek is only 33.6 hours (less than the 35 weekly hours required to be classified as a full-time worker). How about comparing CEO compensation to the compensation of rank-and-file workers (including fringe benefits) who are working the same number of weekly hours as a typical CEO?

4. CEOs of the S&P 500 are typically in their peak earning years, and their average age is about 57 years. In contrast, the 100 million rank-and-file workers considered by the AFL-CIO include workers of all ages, including many young and part-time workers. A more accurate, apples-to-apples comparison would adjust for age and would compare CEO compensation to the compensation of full-time rank-and-file workers in their prime earning years, e.g. workers in their late 50s.

Based on today’s WSJ article, here’s another item to add to the long list of shady statistics used by the AFL-CIO to calculate an inflated CEO-to-worker pay ratio:

5. The AFL-CIO uses average CEO compensation instead of median CEO compensation, which inflates the figure used for the annual compensation of a typical S&P 500 CEO by about $1.5 million ($13.1 million average vs. $11.7 million median CEO compensation for 2016, and $12.4 million vs. $10.8 million in 2015). By using average CEO pay, the figure is unfairly biased upwards by the influence of a small group of very highly paid outlier CEOs. For example, in 2016 Charter Communications CEO Thomas Rutledge was paid $98.5 million, and six other CEOs were paid more than $40 million.

It’s a standard statistical practice that whenever there are extreme outliers (e.g., home prices, household income) in a sample, median values should be used (median home price, median household income) to more accurately reflect a typical or representative value. If the AFL-CIO had used median instead of average CEO pay, its CEO-to-worker pay ratio would have declined from 347-to-1 to 310-to-1 in 2016, and from 335-to-1 in 2015 to 291-to-1. Therefore, in addition to all of the other questionable statistics used by the AFL-CIO, the use of average CEO pay instead of median CEO pay has artificially inflated its CEO-to-worker pay ratio in the range of 12-15% over the last several years.
Bottom Line: As I reported in this recent CD post, when you correct for many of the questionable statistics used by the AFL-CIO (using median CEO pay of the Russell 3000 companies, including fringe benefits for rank-and-file workers, and assuming a workweek for rank-and-file workers that more closely matched the average weekly hours of a CEO) a more realistic statistical approach deflates the CEO-to-worker pay ratio down from the 347-to-1 ratio reported by the AFL-CIO to a ratio in the 40-to-1 to 60-to-1 range. As I concluded in that post (slightly revised):

Perhaps CEO compensation is an issue that deserves attention. But to bring attention to the issue, the AFL-CIO’s annual reports on the CEO-to-worker pay ratio use a bogus statistical methodology that is so flawed, deceptive and distorted that the union group’s yearly gripes about CEO pay really can’t be taken very seriously. It’s pretty obvious that the AFL-CIO’s approach is to artificially inflate the CEO-to-worker pay ratio for publicity purposes and to generate sensationalized media attention by comparing the average (not median) total compensation of a small group of the highest paid CEOs in America to the cash-only income of 100 million rank-and-file workers who work an average of only 33.6 hours per week. It’s a dishonest approach that wildly exaggerates economic reality."

On the AFL-CIO’s inflated 347-to-1 CEO-to-worker pay ratio, and the statistical legerdemain used to produce it

From Mark Perry.

"The AFL-CIO released its annual report on CEO pay this week (see details here), and has calculated a CEO-to-worker-pay ratio of 347-to-1 for 2016, based on the average total compensation package for 400 of the S&P 500 CEOs of $13.1 million last year, and the average annual cash income only (excluding fringe benefits) for America’s 100,525,000 rank-and-file workers of $37,632. Here are some observations on the AFL-CIO’s questionable methodology that it uses every year to calculate an inflated CEO-to-worker pay ratio (see this related CD post from last May), and an analysis of how a complete confiscation of CEO pay would affect average worker pay.



1. Worker Pay is for Part-Time Workers and Excludes Fringe Benefits. In its 2017 analysis, the AFL-CIO reports that the average nonsupervisory rank-and-file worker earned $37,632 in 2016. To arrive at that figure, the AFL-CIO reports that its methodology as follows:

The average annual income earned by rank-and-file workers is taken from the U.S. Bureau of Labor Statistics Current Employment Statistics survey. Specifically, it is the average hours and earnings of production and nonsupervisory employees on private nonfarm payrolls. The average weekly pay is multiplied by 52.

Here are more details of how average worker pay is calculated. It is based on an average hourly wage of $21.56 for nonsupervisory workers in 2016 (BLS data here) and an average workweek of only 33.6 hours (BLS data here) for the average rank-and-file worker. Assuming 52 weeks of work per year: $21.56 per hour x 33.6 hours per week x 52 weeks ≈ $37,632 average annual earnings for the typical worker. However, the fringe benefits that all rank-and-file workers receive as part of their total compensation are conveniently not considered by the AFL-CIO.

Therefore, the AFL-CIO’s engages in some questionable statistical chicanery by sloppily reporting an apples-to-oranges comparison of: a) total CEO compensation for only about 400 CEOs working full-time to b) the cash wages only for 100 million rank-and-file workers, who work an average of less than 34 hours per week, and are therefore mostly part-time, not full-time workers. But you would never know that from the AFL-CIO’s website because the average hourly pay and average hourly workweek of rank-and-file workers are never reported, and I guess nobody has ever bothered to check to find out that the AFL-CIO is using average annual cash-only income (excluding fringe benefits) for mostly part-time employees working 33.6 hours per week on average. 

Questions: a) How would the AFL-CIO’s CEO-to-worker pay ratio change if we calculate average worker pay for full-time workers, b) how would the ratio change if we compare the average pay for a rank-and-file workers who work the same number of hours that a typical CEO works, e.g. 45, 50 or 60 hours per week, and c) how would the ratio change if we compare total compensation of both CEOs and rank-and-file workers working full-time? The chart above summarizes how the CEO-to-worker pay ratio would change, here are the details:

a. Assuming a 40-hour workweek for full-time rank-and-file workers at $21.56 an hour, and adding the monetary value of additional compensation in the form of employer-provided benefits of $10.29 per hour (based on the 47.7% average that benefits represent as a share of hourly earnings according to the BLS) for hourly compensation of $31.85, and annual total compensation of $66,248, we would get a CEO-to-worker compensation ratio of 198-to-1.

b. Assuming a 45-hour workweek for full-time rank-and-file workers, hourly compensation of $31.85 and annual total compensation of $74,529, we would get a CEO-to-worker compensation ratio of 176-to-1.

c. Assuming a 50-hour workweek for full-time rank-and-file workers, hourly compensation of $31.85 and annual total compensation of $82,810, we would get a CEO-to-worker compensation ratio of 158-to-1.

d. Assuming a 60-hour workweek for full-time rank-and-file workers, hourly compensation of $31.85 and annual total compensation of $99,372, we would get a CEO-to-worker compensation ratio of 132-to-1.

By considering both total compensation (including fringe benefits) for both CEOs and rank-and-file workers, and by considering longer workweeks for rank-and-file workers that would be more comparable to the average hours worked by a CEO of a major multi-national corporation in the S&P 500, we can get a more accurate apples-to-apples comparison. Those more accurate comparisons result in CEO-to-worker compensation ratios of between 198-to-1 (for rank-and-file workers averaging 40-hour workweeks) to as low as 132-to-1 for rank-and-file workers putting in 60-hour weeks that might be the most comparable to the average workweek of a top CEO. Ratios that are between 43% and 62% lower than the AFL-CIO’s 347-to-1 ratio that will be generating sensationalized media coverage in the coming weeks.

2. Confiscation and Redistribution of CEO Pay. And what’s the whole point of the AFL-CIO’s annual reports on CEO-to-worker pay ratio? The sub-title of the AFL-CIO’s 2016 Executive Paywatch website pretty much sums it up: “More for Them, Less for Us.” 

The AFL-CIO’s message seems to be that if CEOs weren’t being so generously over-compensated, then the rank-and-file workers would be doing much better and making higher wages. For example, according to the AFL-CIO in 2014:

America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while workers’ wages have stagnated.

The AFL-CIO has fallen here hook, line and sinker for the zero-sum, fixed pie fallacy, one of the most common economic mistakes that falsely assumes that one party can gain only at the expense of another. But let’s assume that there is a “fixed pie of wages” and do some confiscation and redistribution of CEO compensation to see how that would affect average rank-and-file worker pay.
Q: If the CEOs of the S&P 500 companies received $13.1 million on average last year, then as a group, those 500 CEOs received about $6.55 billion in total compensation in 2016. If the AFL-CIO could wave a magic wand and confiscate that entire amount and redistribute $6.55 billion to the current 100,525,000 rank-and-file workers, what would each one get?

A: An annual increase in pay of about $65 for each rank-and-file worker before taxes, or about $1.25 more per week and only 3.7 cents per hour. In other words, complete confiscation and redistribution of S&P 500 CEO compensation would make almost no difference for the average rank-and-file worker.

Bottom Line: The AFL-CIO can only get a distorted and wildly inflated CEO-to-worker pay ratio of 347-to-1 with an apples-to-oranges analysis that compares the total annual compensation of a small, select group of CEOs heading America’s largest multi-national corporations, who probably typically work 50-60 hours per week or more, to the average annual cash wages of part-time rank-and-file employees who work less than 34 hours per week on average. Once we make a more statistically valid apples-to-apples comparison, the CEO-to-worker compensation ratio falls by more than 40% from the AFL-CIO’s 347-to-1 ratio to less than 200-to-1 once we consider total compensation for both CEOs and full-time (40 hours per week) rank-and-file workers. If we assume a 60-hour work week for the average worker (to be comparable to the workweek of an average CEO), the CEO-to-worker compensation ratio falls by 62% to only 132-to-1. Further, even if we could confiscate 100% of the compensation of all S&P 500 CEOs, the typical rank-and-file worker would probably get less than $1 per week in after-tax earnings. Big deal.

Just like last year, the CEO-to-worker pay ratio reported by the AFL-CIO gets my annual “Biggest Blindly Accepted Statistical Fairy Tale of the Year Award.” Well no, it’s actually a tie with the gender wage gap myth and the incessantly repeated “77 cents on the dollar” statistical falsehood. What’s disappointing is that much of the mainstream media seem to blindly accept both of these statistical falsehoods without ever challenging the “statistical legerdemain” that are used to produce and perpetuate these statistical myths. One exception was this excellent article in 2015 by Investor’s Business Daily’s John Merline (“Do CEOs Make 300 Times What Workers Get? Not Even Close“) who concluded:

What’s not understandable is why the mainstream press keeps repeating the massively inflated 300-to-1 number without noting the statistical legerdemain that produced it."

What if the compensation for all S&P 500 CEOs were confiscated and redistributed to rank-and-file workers?

From Mark Perry.

"I wrote a few days ago on CD about how both Hillary Clinton and Bernie Sanders have been criticizing “excessive CEO pay.” A campaign ad for Hillary tells us that “On average, it takes 300 Americans working for a solid year to make as much money as one top CEO. It’s called the wage gap.” In a Tweet last month, Bernie Sanders lamented that “CEOs make 300 times what their workers make. That is simply immoral and must be dealt with.” A few years ago, the AFL-CIO made this statement:

America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while wages have stagnated and unemployment remains high. Today’s CEO-to-worker pay ratios are simply unconscionable.

OK, let’s assume that Hillary and Bernie are correct that CEO pay in America is excessive and immoral, and is a problem that “must be dealt with,” according to Sanders. Let’s also accept the AFL-CIO’s statements above that today’s CEO-to-worker pay ratio is unconscionable, and that America’s corporate CEOs have been gobbling up a greater and greater share of the payroll pie at the expense of the average worker in recent decades.

In that case, let’s analyze what would happen if we could either: a) confiscate 100% of the compensation paid in 2014 to the S&P 500 CEOs and redistribute all of that income to the 97,734,00 production and non-supervisory workers cited by the AFL-CIO as America’s rank-and-file workers, or b) cap the CEO-to-worker pay ratio at either the “less unconscionable” 1980 level of 42:1 or the “less immoral” 1960 ratio of 20:1 and confiscate and redistribute the excess CEO pay above those caps to the 97.734 million rank-and-file hourly workers. The table above summarizes how that confiscation and redistribution of CEO pay would affect the average worker’s annual income and hourly pay rates.



Here’s a summary:

1. The AFL-CIO reports that CEOs of companies in the S&P 500 received $13.5 million in average total compensation in 2014, and those 500 CEOs as a group would have therefore generated $6.75 billion in compensation. If that total amount of almost $7 billion was confiscated and redistributed equally to the 97.734 million workers that the AFL-CIO uses for its “average worker pay” calculation, each of those rank-and-file hourly workers would have received $69.07 in extra annual pre-tax income in 2014, or about 3.5 cents per hour for a 40-hour workweek and about 4.2 cents per hour for a 33.7-hour workweek (which is the average workweek for the AFL-CIO’s rank-and-file workers, many of whom work part-time), see first row of data in the table above.
2. If we could impose the 1980 CEO-to-worker pay ratio of 42:1, the average S&P 500 CEO compensation in 2014 would have been only about $1.5 million (42 x $36,134 in average worker pay according to the AFL-CIO), and the 500 CEOs would have earned only $759 million in 2014, instead of $6.75 billion. Distributing the nearly $6 billion in excess earnings in 2014 to the 97.734 million rank-and-file workers would have increased their annual pre-tax income by $61.30, and their hourly pay by 3.1 cents or 3.7 cents before tax, depending on the number of weekly work hours (see middle row of data in the table above).
3. Going all the way back to the 1960s, and capping the CEO-to-worker pay ratio at 20:1 would mean that the average annual CEO compensation in 2014 would have been only about $723,000 (20 x $36,134 average worker pay), generating nearly $6.4 billion in excess CEO pay to redistribute to average workers. Each of the 97.734 million rank-and-file workers would have gotten an increase in their annual pay of about $65 in 2014, and their hourly pay would have gone up by less than 4 cents, before tax (see last data row in the table above).

MP: Even if Bernie Sanders, Hillary Clinton, and the AFL-CIO had their way and could “deal with” the unconscionable, immoral “CEO wage gap” by confiscating 100% of the compensation of all 500 CEOs in the S&P 500, and then redistribute that $6 billion of “excessive” executive compensation to America’s 97,734,000 rank-and-file workers, the average full-time worker’s income would only increase by 3.5 cents per hour – and that’s before taxes. And if either Hillary or Bernie get elected as president and issues an executive order capping CEO compensation at the 20:1 CEO-to-worker pay ratio that prevailed in 1960, and redistributed the excess CEO pay to the rank-and-file, the average worker would see his or her weekly pay increase by $1.32 – before taxes. Big deal.

Bottom Line: There might be a lot of reasons that average worker pay has stagnated over the last decade – intense international competition, an increase in fringe benefits as a share of total worker compensation that has slowed monetary wage increases, the adverse economic effects of the Great Recession, the slowest and weakest economic recovery in more than 50 years — but the increased compensation for America’s top S&P 500 executives certainly isn’t one of them. To stimulate job growth, and increase the wages and income of the average worker, Clinton and Sanders should be looking at ways to increase and expand economic opportunity in America. Unfortunately, most of their progressive policy prescriptions involve greater government involvement in the economy, more regulations, and higher taxes, which will likely retard economic opportunities and slow economic and wage growth. In that case, don’t expect the “CEO wage gap” to change much under a Clinton or Sanders administration."

Hillary and Bernie both complain about excessive CEO pay, but the average CEO makes less than Hillary’s speaking fee

From Mark Perry.

"In the campaign ad above for Hillary Clinton, the narrator tells us that “On average, it takes three hundred Americans working for a solid year to make as much money as one top CEO. It’s called the wage gap.” In a Tweet last month, Bernie Sanders lamented that “CEOs make 300 times what their workers make. That is simply immoral and must be dealt with.”



How accurate are those claims that CEOs in the US make 300 times more than an average full-time American worker? Even if true, so what, is that a problem to be “dealt with”? I’ve blogged about this before on CD, see posts here, here, here and here. Here are a few additional thoughts and observations:

1. If we want an accurate “apples-to-apples” comparison, then shouldn’t we really compare the average CEO in the US to the average American worker? In 2014, there were 21,550 Chief Executives working full-time “managing a company or enterprise” and those CEOs earned an average annual salary of $216,100 according to the BLS. That’s about the same annual salary of $201,030 for the average orthodontist.

The average private full-time American worker in 2014 earned $48,920 (based on an average hourly wage of $24.46). That would give us an “Average CEO-to-Average-Worker Pay“ ratio of only 4.4-to-1 in 2014. That ratio has been been stable over the last 8 years at an average of 4.4-to-1 between 2007 and 2014 (see chart above).

To re-state Hillary Clinton’s claim above: “On average, it takes only 4.4 average Americans working for a solid year to make as much money as one average CEO. It’s called the wage gap.”

2. But Hillary and Sanders, along with the AFL-CIO, like to compare the total compensation of a very small sample of only about 350-475 of the highest-paid CEOs in the US to the average annual pay for about 100 million hourly workers employed at private companies (small, medium and large companies), and some of those workers are part-time. Note that Hillary qualifies her claim of a 300-to-1 CEO-to-worker pay ratio by referring to “top CEOs.” It’s hard to know the exact number for sure, but many of those 100 million hourly workers don’t even work for one of the 350-475 companies headed by a “top CEO.” For example, think of an American working at a small hardware store in Kansas, a family-run restaurant in Montana or a small family-owned grocery store in Kentucky. What sense does it make to compare Apple CEO Tim Cook’s $10m salary to the annual pay of workers who work for those small companies?

Of course, when the average person hears from Hillary or Sanders that there’s a 300-to-1 “wage gap,” and thinks about 300 Americans working all year to equal the salary of one top CEO, many of them are understandably upset. So upset that they can easily be persuaded that something must be done, by Hillary and Bernie of course, to address the “problem” of “excessive CEO pay,” using the heavy hand of government force if they’re elected president.

But when you have a total workforce of 150 million Americans, and you look at 300-400 of the highest paid executives in the US at the head of large, multi-national corporations, and compare their average compensation to the annual income of the “average hourly worker,” including many at small and medium sized firms, why wouldn’t we expect a large “wage gap”? Just like you’d expect to find a pretty big “wage gap” if you compared the average annual income of America’s 100-200 highest paid athletes, or the average salary of the country’s 100-200 highest paid entertainers, musicians or celebrities to the $48,920 annual income of the average hourly worker. And yet we rarely hear complaints about “excessive athlete, musician, or celebrity pay.”

3. Then there’s the inevitable lamenting about how the “CEO-to-worker pay ratio” has increased so much over time. It was about 20-to-1 in 1965, and has grown over time to the current 300-to-1 ratio that Hillary and Bernie complain about. But why wouldn’t we expect the ratio to increase over time? The size of the US workforce has doubled since the 1960s from about 75 million to 150 million workers, so the top 350-500 CEOs have become a smaller and smaller minority of all workers as total payrolls keep increasing. And adjusted for inflation, the S&P500 Index has increased three-fold since the 1960s, meaning that the CEOs of today’s S&P 500 companies are managing firms that are many times larger than S&P500 firms in the past and therefore deserve greater compensation relative to the average worker. For example, the value provided by an average hourly worker at Target or McDonald’s hasn’t changed much in the last 25 years. But the CEOs of Target and McDonald’s today are managing retail and fast food giants that are many times larger than the Target and McDonald’s in the early 1990s.

4. To put the size of the largest of today’s S&P500 companies into perspective, I posted last week on CD about how the market value of Apple’s stock at $521 billion is greater than entire stock market of Brazil ($490 billion). Further, the combined market cap of Apple, Google, Microsoft, ExxonMobil and GE exceeds $2 trillion and those five companies as a separate country would be the world’s 6th largest stock market. It’s not surprising that the CEOs of S&P 500 companies whose value is comparable to the market caps of the entire stock markets of other countries are highly compensated.
Bottom Line: It might be a little disingenuous and hypocritical for Hillary Clinton to complain about excessive CEO pay when her minimum speaking fee, reportedly $225,000 for a one-hour talk, is more than the $216,000 average annual CEO salary in 2014. We could say how unfair it is that the average CEO in America has to work a full year, 50 weeks full-time, to earn the same income that Mrs. Clinton earns in about 50 minutes giving a speech! How unfair! How immoral! Something must be done!

And if Bernie Sanders compares the pay for an average CEO to the average worker — i.e. compares “apples to apples” — and understands that the Average CEO-to-Average-Worker Pay ratio was only 4.4-to-1 in 2014, I’m not sure how he can call that an “immoral” outcome that must be “dealt with.” If Sanders wants to deal with some excessive pay that’s “immoral” maybe he should start with Mrs. Clinton’s excessive speaking fees before dealing with CEO pay. Or he might deal with the “immorality” that there are currently more than 60 NBA players who will earn $12 million or more this season, which is more than the average CEO of an S&P500 company earns!

The claim of a 300-to-1 ratio for CEO-to-worker pay made by Hillary, Bernie and the AFL-CIO gets my “Biggest Blindly Accepted Statistical Legerdemain Award.” Well no it’s actually a tie with the gender wage gap myth mentioned in the Hillary ad above and the perpetual and incessantly repeated “77 cents on the dollar” statistical falsehood."

Research says: the companies that paid their CEOs the most saw their stocks do the best, and those that paid the least saw their stocks do the worst

Widespread Wealth Has Active Causes – Most Notably, Entrepreneurship by Don Boudreaux of Cafe Hayek.

"Here’s a letter to the Washington Post:

Robert Samuelson correctly notes that CEO pay over the past three decades has become tied more closely to the value of share prices and that CEO pay today is generally higher than it was thirty years ago (“The CEO backlash,” June 22).  But crediting only lower inflation and interest rates, Mr. Samuelson errs in asserting that “CEOs had nothing to do with this” rise in the overall real value of shares – and, hence, “nothing to do” with the increase in their pay.

While improved monetary and fiscal policies are unquestionably boons (to everyone, and not just to CEOs), companies never manage themselves.  Weak leadership, failures to anticipate changing consumer demands, imprudent decisions to expand, and hosts of other executive errors lower a company’s market value – and often hurl it into bankruptcy – even under ideal monetary and fiscal conditions.  Likewise, sound monetary and fiscal policies do not themselves spontaneously generate iPads, Amazon.com, Facebook, fracking, and the uncountable other goods and services that greatly improve our lives: these things – and the all-important means of making them widely available at affordable prices – require entrepreneurial vision, risk-taking, and hard work.  Entrepreneurship, successful management, and wealth creation are not bundles of manna that rain down upon a land if only it is blessed with prudent central bankers and parsimonious budget officials.

Evidence of the continuing importance of the scarce resource ‘executive talent’ is found in research done by Steven Kaplan and Joshua Rauh.  These economists find that (quoting Kaplan) “Analyzing some 1,700 firms, we found that compensation was highly related to performance: the companies that paid their CEOs the most saw their stocks do the best, and those that paid the least saw their stocks do the worst.”*  This conclusion makes sense to everyone who understands that there is nothing routine about starting and managing successful businesses, and that wealth requires for its creation active and on-going human imagination, enterprise, and effort.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* Steven N. Kaplan, “The Real Story Behind Executive Pay,” Foreign Affairs, May/June 2013.

On the more general question of the role that CEO pay has (or has not) played in raising income inequality, see this Summer 2013 Journal of Economic Perspectives paper by Kaplan and Rauh."

What about “excessive dentist pay” or the obscene “orthodontist-to-average worker pay” ratio?

From Mark Perry.

"Business Insider had a post yesterday titled “This epic chart shows the average wage for almost every job in America,” based on Reddit user Dan Lin’s chart showing the average annual wages in 2013 for more than 800 US occupations tracked by the Bureau of Labor Statistics. The chart featured by BI has actually been circulating on various blogs and websites for the last year (see examples here, here, and here), and new BLS wage data are now available for 2014.

Regardless, the top 20 highest-paid occupations for 2013 are displayed above and help illustrate a few important points about chief executive (CEO) pay:

1. CEOs in the US earned an average annual wage in 2013 of $178,400 and ranked No. 10 by occupation for the highest average annual wages in that year, behind nine medical occupations including psychiatrists ($182,700), family practice MDs ($183,900), internists ($188,400), orthodontists ($196,300), and anesthesiologists ($235,100).

2. CEOs earned only about $13,800 (and 8%) more than the average dentist ($164,600) in 2013, which works out to an hourly difference of $6.63 ($85.77 per hour for CEOs vs. $79.13 for dentists), assuming a 40-hour workweek. No offense to dentists, but if we realistically assume that the average CEO might have a longer workweek than the average dentist, the average CEO earns less per hour than the average dentist: e.g. $76.24 for an average 45-hour CEO workweek and $68.62 for a 50-hour CEO workweek.

3. Based on 2014 wage data, the CEO-Dentist wage difference shrunk because the annual wages of the average dentist increased by almost 4% last year to $170,940, while the wages of the average CEO increased by only 1.29% to $180,700, which was actually below the 1.6% annual rate of inflation from 2013 to 2014. In 2014, the average CEO earned less than 6% more than the average dentist, a difference of less than $5 on an hourly basis. If we assume an average CEO workweek of 42.5 hours vs. 40 hours for a dentist, the average CEO made less per hour last year than the average dentist.

Bottom Line: These are pretty easy questions to answer, but let me pose them anyway: Why don’t we ever hear about “excessive” or “obscene” dentist/family practice MD/internist/psychiatrist wages? Or about objectionable “Dentist-to-Average Worker Pay” ratios?

Of course, there are some CEOs who earn multimillion dollar pay packages, while there are probably no dentists making millions of dollars per year, so it’s the “excessive” pay of a few hundred outlier CEOs that gets all of the media and union attention. But it’s an important point that gets completely lost in the discussion of “obscene” CEO pay – the average CEO earns just slightly more than the average dentist and less on average than nine medical occupations that are listed above.

HT: Steve Bartin

Related Bonus Quotation of the Day:

From Ayn Rand, writing in her 1966 book Capitalism: The Unknown Ideal, p. 60-61 of the chapter “America’s Persecuted Minority: Big Business” (emphasis original):

Businessmen are the one group that distinguishes capitalism and the American way of life from the totalitarian statism that is swallowing the rest of the world. All the other social groups – workers, farmers, professionals, scientists, soldiers – exist under dictatorships, even though they exist in chains, in terror, in misery, and in progressive self-destruction. But there is no such group as businessmen under a dictatorship. Their place is taken by armed thugs: bureaucrats and commissars. Businessmen are the symbol of a free society – the symbol of America. If and when they perish, civilization will perish. But if you wish to fight for freedom, you must begin by fighting for its unrewarded, unrecognized, unacknowledged, yet best representatives – the American businessmen."

Where CEO Pay Ranks

From Business Insider.

How egalitarianism failed Japan

From Scott Sumner of EconLog.

"Some progressives complain that American CEOs are overpaid. They point to the fact that the spread between the highest and lowest employee in a Japanese corporation is far lower than in the US. The implication is that if only the CEOs in the US would accept smaller salaries, the shareholders would gain larger profits. In fact, as the Japanese case shows the exact opposite is far more likely. Here's a graph from a recent article in The Economist:

The performance of Japanese corporations in recent decades has been abysmal.
Obviously there is no single factor involved, but the Economist does a nice job of explaining many of the peculiarities of the Japanese labor market, such as the lifetime employment system (which increasingly excludes younger workers), rigid promotion by rank and tenure, and fixed pay scales. Here's one company that is beginning to change:

There is no firm that better embodies the results that reform can achieve than Hitachi. It was formerly one of Japan's most conservative: the consummate "community" firm, at which employees and their families, and suppliers and their dependents, all took precedence over shareholders. In 2008 it notched up the largest loss on record by a Japanese manufacturer. Since then it has spun off its consumer-related businesses in flat-panel TVs, mobile phones and computer parts to refocus on selling infrastructure such as power plants and railway systems. More recently Hitachi has made efforts to change its internal culture. Last year it all but abandoned one of the central pillars of Japanese business: the seniority-wage system, in which salaries are based on age and length of service rather than on performance. The results of all this have been stellar. Its operating profits in the year to March rose by 12% to ¥600 billion ($5 billion). Now, says Kathy Matsui of Goldman Sachs in Tokyo, stockmarket investors are all searching for the next Hitachi. Activists and private-equity firms are sensing an opening up of opportunities. Seth Fischer, an activist investor, says the government's backing makes all the difference when it comes to shaking up firms. He is preparing to take on two industrial giants, Canon, a camera-maker, and Kyocera, an electronics and ceramics manufacturer, over their complex corporate structures.

The growing proportion of shares in Japan's listed companies owned by foreigners (see chart 2) has undoubtedly added to the pressure on firms to change.

The traditional system was well-intentioned, but simply doesn't work in the modern world:

Japanese firms have clung to their traditions of lifetime employment in a single workplace, and of paying and promoting people according to seniority, because they believe those traditions have merits. Indeed, they foster loyalty, and thereby encourage firms to invest in training graduates without fear of them being poached by rivals, argues Yoshito Hori, the founder of GLOBIS, a business school. However, it is no way to produce the sort of managers needed to lead modern, knowledge-based industries. "Imagine if you took managers at Apple, Google and Amazon and replaced them with people promoted on the basis of length of service rather than merit," says Atul Goyal, an analyst at Jefferies, a stockbroker. "How long do you think those companies would last?" 

Young and frustrated

The voice of Japan's young workers, who are generally underpaid and underpromoted, recently found an outlet in a surprise hit television drama, set in a fictional version of Japan's largest bank. Much of the country seemed to identify powerfully with the show's talented hero, Naoki Hanzawa, a loan manager, who kicks back against the bank's higher-ups and refuses to take the blame, as Japanese corporate culture dictates he ought, for the bosses' many profit-destroying blunders.

Hitachi's salarymen are similarly cheering the firm's shift to performance-related pay and promotion. If you are in your late 40s you might be nervous, since the ascent of the corporate ladder now comes with some uncertainty, says one. But younger hires are ecstatic. It won't even matter as much if you went to the wrong university as long as you work hard, exults another employee. Panasonic, Sony and Toyota are also moving towards more performance-related pay and promotion.

Those who plod their way to the top of Japanese firms tend too often to be conservative and narrow-minded. The way they are rewarded does not provide much incentive to try hard: not only is their pay smaller than that of their peers in other developed economies, it is less tied to their performance (see chart 4). When it comes to aligning the interests of bosses and shareholders, Japan is stuck roughly in the 1970s, says Jesper Koll, an economist and adviser to the government.

There is much more, highly recommended.

It's tempting to think that we'd be better off if we severely limited the ability of bankers and businessmen to amass large fortunes. But so far no one has figured out how to achieve a dynamic modern economy without rewarding merit. The sad decline of the once dynamic Japanese economy is a case in point. 

 Of course Japan is far from being the worst off country in the world. But giving its rapid growth in the period leading up to 1991, its quite well educated and highly disciplined population, its relatively long work hours, and its 3.2% unemployment rate, it should not have a per capita GDP (PPP) 30% lower than America, Singapore and Hong Kong, and productivity levels far below those of Germany. Something is wrong."