AEI Using CEO pay for the Russell 3000 firms brings AFL-CIO’s CEO-to-worker pay ratio from 347 to only 62 or less The chart above shows various CEO-to-worker pay ratios under two assumptions about which CEOs are considered, several different assumptions about the number of weekly work hours for rank-and-file workers, and the inclusion of fringe benefits for those workers. The tallest bar represents the 347-to-1 CEO-to-worker pay ratio reported recently by the AFL-CIO for 2016 using the average (not median) total compensation package of .1 million for 419 CEOs in the S&P 500 compared to the cash-only wages of rank-and-file workers (production and nonsupervisory employees) with an average workweek of only 33.6 hours. Interestingly, the AFL-CIO maintains CEO compensation data for “some
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The chart above shows various CEO-to-worker pay ratios under two assumptions about which CEOs are considered, several different assumptions about the number of weekly work hours for rank-and-file workers, and the inclusion of fringe benefits for those workers. The tallest bar represents the 347-to-1 CEO-to-worker pay ratio reported recently by the AFL-CIO for 2016 using the average (not median) total compensation package of $13.1 million for 419 CEOs in the S&P 500 compared to the cash-only wages of rank-and-file workers (production and nonsupervisory employees) with an average workweek of only 33.6 hours.
Interestingly, the AFL-CIO maintains CEO compensation data for “some 3,000 corporations, including most of those listed in the Russell 3000 Index.” Isn’t it curious then that the AFL-CIO only considers the CEO pay of about 400 of the highest paid CEOs among those 3,000 CEOs in its database? After all, the AFL-CIO considers the average pay of a comprehensive group of 100 million rank-and-file workers to calculate its CEO-to-worker pay ratio, but then restricts its CEO sample to only the very highest paid of the 3,000 CEOs. Many millions of the rank-and-file employees work for small and medium size companies that aren’t publicly traded and are therefore not included in either the S&P 500 or the Russell 3000.
I previously published a post on CD showing how the 347-to-1 CEO-to-worker pay ratio would change if: a) we add fringe benefits to rank-and-file workers’ cash income to more accurately compare total worker compensation to total CEO compensation, and b) consider longer workweeks for the rank-and-file employees to more accurately match the long hours that most CEOs work. Making those adjustments significantly reduced the CEO-to-worker pay ratio from 347-to-1 to between 132-to-1 (60 hour week and fringe benefits for rank-and-file workers) and 198-to-1 (40 hour week with fringe benefits).
Here in this post I consider the median CEO pay of $4.1 million for the entire Russell 3000 in 2016. After all, the combined payrolls at all S&P 500 firms totaled about 25 million employees in 2015, but that includes millions of foreign workers and hundreds of thousands of managers and executives who are not “production and nonsupervisory” rank-and-file workers. Therefore, the AFL-CIO includes many tens of millions of rank-and-file workers in its sample who don’t even work at companies headed by the CEOs they consider for its pay ratio. On the other hand, the Russell 3000 includes the 3,000 largest US public companies and represents approximately 98% of the American public equity market and provides a much more comprehensive group of CEOs whose companies employ a much greater share of the 100 million rank-and-file workers than just the 400 CEOs considered by the AFL-CIO for its CEO-to-worker pay ratio.
The chart above shows the following:
a. Using the AFL-CIO’s assumption of a 33.6 hour workweek and no fringe benefits, the CEO-to-worker pay ratio for the Russell 3000 CEOs is only 109-to-1 (less than half of the 347-to-1 ratio).
b. Assuming a 40-hour workweek and standard fringe benefits (see previous CD post for details), the CEO-to-worker pay ratio for Russell 3000 CEOs falls to only 62-to-1, an 82% reduction in the AFL-CIO’s reported ratio of 347-to-1. Stated differently, compared to this 62-to-1 ratio, the AFL-CIO’s pay ratio of 347-to-1 is inflated by a factor of more than five times because it uses the full compensation packages for only about 400 of the highest-paid CEOs in America and compares them to the cash-only wages of 100 million rank-and-file workers working less than full-time on average.
c. Assuming workweeks of 45, 50 and 60 hours for rank-and-file workers to more closely match the workweek of a typical CEO, the CEO-to-worker pay ratios for CEOs in the Russell 3000 decline further to 55-to-1, 50-to-1 and 41-to-1. Using the AFL-CIO’s shady apples-to-oranges methodology inflates those more realistic CEO-to-worker pay ratios by six to nine times! But a wildly inflated ratio of 347-to-1 gets a lot more publicity than a more realistic ratio of 40 or 50-to-1.
Bottom Line: 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 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. The AFL-CIO should be ashamed of its statistical legerdemain, and the media deserves to be reprimanded for never questioning the shady methodology of the reports produced annually by the nation’s largest union group.