Mark J. Perry:
In an annual ritual that takes place every May, the AFL-CIO releases its “Executive Paywatch” report to publicize what it considers to be the excessive compensation of the CEOs of America’s biggest multinational firms.
The nation’s largest labor federation reports this year that the typical CEO running an S & P 500 firm received total compensation of $12.4 million in 2015 while the average rank-and-file worker was paid just $36,875 — a pay gap of 335-to-1.
But the AFL-CIO can only get such an inflated pay ratio by applying a series of statistical sleights of hand that result in an invalid apples-to-oranges comparison of the total compensation for CEOs to the cash wages of mostly part-time workers.
To start, the AFL-CIO only considers a very small sample of S&P 500 CEOs to get its 335-to-1 ratio. Using a larger, more representative sample of CEOs produces a much smaller pay gap.
For example, the AFL-CIO’s own website reveals that the average CEO compensation of Russell 3000 companies was $5.7 million last year, which would cut the 335-1 ratio by more than half to only 155-to-1.
Further, BLS data show that there are actually more than 20,000 chief executives employed nationally who “manage companies and enterprises” at an average annual salary of $220,700. For that more comprehensive group of America’s CEOs, the CEO-to-worker pay ratio drops to only 6-to-1.
Then there’s the issue of average pay for rank-and-file workers. The AFL-CIO reports an annual pay figure of $36,875 in 2015 for the “average nonsupervisory worker,” but doesn’t provide any additional details.
Here are the details not provided by the AFL-CIO.
The $36,875 annual average worker pay for the 99 million “production and nonsupervisory employees” is based on an average hourly wage of $21.04 for rank-and-file workers in 2015, an average workweek of only 33.7 hours for those workers, and an assumption of 52 weeks of work per year. That’s how the AFL-CIO gets its reported annual pay for the average U.S. worker: $21.04 per hour x 33.7 hours per week x 52 weeks = $36,875.
So every year, to get the highest possible pay ratio, the AFL-CIO does a statistically deceptive comparison of the total compensation for only 500 CEOs who are working full-time and in their prime earning years to the cash wages only for 99 million rank-and-file workers who are mostly part-time workers. But you would never know that from the AFL-CIO’s website because the details of average worker pay are never fully explained.
How would the AFL-CIO’s outsized pay ratio change if we considered total compensation for both CEOs and full-time rank-and-file workers? To make the comparison as accurate as possible, let’s consider rank-and-file employees working a 50-hour week (even though most CEOs probably more than 50 hours a week) and receiving fringe benefits equal to 46% of their cash wages, which is the current estimate from the BLS for all workers.
The total annual compensation for rank-and-file workers would be nearly $72,000 and would result in a CEO-to-worker compensation ratio of only 172-to-1. In other words, the AFL-CIO’s reported CEO-to-worker pay ratio is inflated by a factor of almost two times by comparing the total compensation of CEOs to the average cash wages for part-time workers.
Beyond the statistical chicanery used to generate an inflated pay ratio, what’s the point of the AFL-CIO’s annual reports on CEO pay? The AFL-CIO tells us that although America is supposed to a land of opportunity, the rising CEO-to-worker pay gap means that “corporate CEOs have been taking a greater share of the economic pie” while wages have stagnated for the average worker. The message is that if CEOs weren’t being so generously compensated then rank-and-file workers would be making higher wages rather than getting only the leftover scraps.
Let’s do a little experiment: The S&P 500 CEOs received $6.2 billion as a group in total compensation in 2015. If the AFL-CIO could confiscate that entire amount and redistribute it to the rank-and-file workers, how would that affect average worker pay?