Earlier this month, the Mises Institute, an Austrian education institution, published an article entitled The Myth of CEO Pay and “Greed” in which the author, Matt Palumbo (@MattPalumbo12), argues that the widely touted statistic that CEOs out-earn the average worker 331:1 has been blown out of proportion. The author argues, rightly so, that this statistic (calculated by the AFL-CIO) only represents those CEOs working at S&P 500 companies while there are over 27 million private firms in the United States. In fact, when the Bureau of Labour’s 2013 statistics are used, the average CEO’s pay was $178,400. According to Mr. Palumbo, “[t]he larger sample of CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”
However, the $178,400 figure is also misleading. Why? Because the Bureau of Labour only includes certain categories of remuneration in calculating pay. The Bureau of Labour’s figures include: base rates, commission, cost-of-living allowances, guaranteed pay, incentive pay related to actual individual or group production, and production bonuses. Most importantly, they exclude stock awards, non-production bonuses and year-end bonuses, categories of pay that can reach many multiples of an executive’s salary. The Bureau of Labour also excludes many other important elements of CEO pay, including attendance bonuses, perquisites, profit-sharing payments, relocation allowances and severance pay.
The problem anyone has when trying to calculate an overall average is that it is impossible to obtain data on what every CEO at every company is paid. Only those companies that are publicly traded have an obligation to report detailed figures on executive remuneration. Figures from the 27 million private American firms will remain just that – private, except to the extent that certain remuneration figures must be reported to the Bureau of Labour.
Beyond this, the pay of CEOs at small, privately held firms is not directly comparable to the pay of CEOs at publicly traded companies. The CEOs at many of the 27 million private American firms will also be the owners of those companies, or directly beholden to the owner. The CEOs of publicly traded companies are responsible to a board of directors and shareholders who are scattered across the country. The agency problem (shareholders are unable to adequately monitor and supervise the board and CEO who are supposed to be acting in their best interests) is much more pervasive at publicly traded companies than privately held firms. It is this problem that the 331:1 statistic highlights, and it is this problem that regulation tries to address.
Despite the fact that the 331:1 ratio is only based on pay at 350 companies in the S&P 500 index, this does not make the statistic any less accurate in depicting what it does. Pay at the largest companies in our society is out of control, and we need to take steps to rein it in. The problem is not limited to the S&P 500. Let’s look at a company in the Russell 2000 index, an index of small-cap stocks on the opposite end of the spectrum from those in the S&P 500. Since Russell 2000 companies are publicly traded, they are required to disclose detailed figures on executive remuneration. I randomly chose the company Aéropostale from the list of Russell 2000 companies. The CEO of Aéropostale took home a salary of $950,000 in 2013. Add to that, stock awards and other incentives for a total of $13.8 million. This company is not in the top 350. It is not even in the top 500. Yet there is clearly something wrong with this figure.
Mr. Palumbo makes a good point. We need to be clearer about the statistics we are using in order to avoid misleading our readers. We can all do a better job of this. However, we need more than statistics – we also need solutions.