The Big Lie About 'Excessive' CEO Pay

Economics and financial concepts are frequent features on this blog.

Regularly, you might see some variation of "CEO pay 5,000 times higher than the typical worker". Certainly, CEOs make more than the average worker (any why shouldn't they - their actions & decisions have an impact far beyond that of the average worker), but often these types of statements are based on biased or manipulated data. This article does a great job of bringing some real data to the discussion...

The Big Lie About 'Excessive' CEO Pay 
9/14/2018

Last month a union-backed group claimed that the gap between CEO pay and average worker pay surged to 312-to-1 last year. But official government data show the gap is a fraction of that. Guess which one gets more attention?

The latest annual report from the Economic Policy Institute claims that "in 2017 the average CEO of the 350 largest firms in the U.S. received $18.9 million in compensation, a 17.6% increase over 2016. The typical workers' compensation remained flat, rising a mere 0.3%."

Outrageous? Maybe. If it were true.

But the only way EPI and other groups — such as the AFL-CIO — get to these outsized ratios is by comparing apples to, well, orangutans.

As economist Mark Perry has repeatedly pointed out, these ratios use two completely different sets of numbers.

On the one hand, they measure the total compensation — salary, bonuses, stocks and options — for only about 300 or so CEOs at the biggest companies. That's roughly the top 0.1% of all CEOs in the country.

Then they compare that to the average hourly wages paid to all rank-and-file workers nationwide.

"A more accurate comparison would be of S&P 500 CEO compensation to the average pay of employees of those same companies," Perry notes.

Nor do those pay ratios account for the fact that CEOs put in far more hours (close to 60 on average) than the typical rank-and-file worker.

Perry says that when you do a more honest pay comparison, the ratio is more like 50 to 1. That's still big, but nowhere near the eye-popping figures the press keeps reporting.

What happens if you look at the wages of all the nearly 300,000 CEOs in the country, at firms big and small?

What About All CEO Pay?

Instead of tens of millions of dollars, average CEO pay is $196,050 a year, according to BLS data.

That works out to a CEO-to-worker pay ratio of about 4 to 1.

And while the average pay for all CEOs climbed 40% from 2005 to 2017, so did average hourly wages for nonsupervisory workers, BLS data show.

The Economic Policy Institute says that looking at the pay of just the top CEOs makes sense because their companies employ so many people and "set the standards for pay in the executive pay market."

We think Perry has it right when he calls such comparisons "statistical legerdemain."

Whatever the case, these CEO-to-worker pay ratios serve little purpose other than to stoke misguided resentment among workers and create a false impression that CEOs' gains come at the expense of the working class.

If these groups really cared about workers, they'd instead be pushing pro-growth tax cuts and deregulation that will accelerate the economy and boost wages across the board.