Tuesday, September 30, 2014

So what is the CEO to average worker ratio? 511 or 4? Depends on what you report.

CEO Pay Continues to Rise as Typical Workers Are Paid Less | Economic Policy Institute:

NOTE:  This not as an argument against high CEO pay (have made that before), but to show how a study is done influences the reported findings.

We've all seen the headlines of how CEO pay is rising so quickly.

First from the Economic Policy Institute's

Same article:
"The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013...."
"If Facebook, which we exclude from our data due to its outlier high compensation numbers, were included in the sample, average CEO pay was $24.8 million in 2013, and the CEO-to-worker compensation ratio was 510.7-to-1."

295.9 to 510.7 is a pretty big difference.  The authors were justified to not include the outliers, but in dropping outliers we often drop valuable information at best and can influence findings at worse.

But even this, as Mark Perry points out in his May 2014 piece is misleading as the AVERAGE CEO pay (the all important numerator in the ratio) needs an asterisk:  average of what? The average SP 500 firm?  Average largest 200 firms?  or average of all firms?

Why does it mater?  Because when all CEOs are including (think "I am CEO of my own small firm"), the CEO pay is MUCH Much lower.

"According to the US Census Bureau, there are more than 27 million private firms in the US, so the samples of 200-350 firms for CEO pay represent only one of about every 100,000 private firms in the US, or about 1/1000 of 1% of the total firms. And yet the AFL-CIO, AP and others compare the average annual wages of hundreds of millions of full-time employees working at the more than 27 million US companies to the CEO pay of executives at only several hundred companies, which is hardly a fair comparison. 
We can get a more accurate and complete picture of CEO compensation in the US by looking at wage data released recently by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2013. The BLS report provides “employment and wage estimates by area and by industry for wage and salary workers in 22 major occupational groups, 94 minor occupational groups, 458 broad occupations, and 821 detailed occupations,” including the occupational category “chief executives.” In 2013, the BLS reports that the average pay for America’s 248,760 chief executives was only $178,400."

Perry updated his blog this week with the following:
"Based on those data, the average CEO earned $178,400 last year, the average worker earned $46,440, and the “CEO-to-worker pay ratio” was 3.84:1"

What is the takeaway?  Read carefully!  The details of how a study are more important than headlines reveal.
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