Blog Post

AEIdeas

In this campaign ad for Hillary Clinton, the narrator tells us that “On average, it takes three hundred Americans working for a solid year to make as much money as one top CEO. It’s called the wage gap.” In a Tweet last month, Bernie Sanders lamented that “CEOs make 300 times what their workers make. That is simply immoral and must be dealt with.”

How accurate are those claims that CEOs in the US make 300 times more than an average full-time American worker? Even if true, so what, is that a problem to be “dealt with”? I’ve blogged about this before on CD, see posts here, here, here and here. Here are a few additional thoughts and observations:

1. If we want an accurate “apples-to-apples” comparison, then shouldn’t we really compare the average CEO in the US to the average American worker? In 2014, there were 21,550 Chief Executives working full-time “managing a company or enterprise” and those CEOs earned an average annual salary of $216,100 according to the BLS. That’s about the same annual salary of $201,030 for the average orthodontist.

The average private full-time American worker earned $48,920 in 2014 (based on an average hourly wage of $24.46). That would give us an “Average CEO-to-Average-Worker Pay“ ratio of only 4.4-to-1 in 2014. That ratio has been stable over the last 8 years at an average of 4.4-to-1 between 2007 and 2014 (see chart above).

To re-state Hillary Clinton’s claim above: “On average, it takes only 4.4 average Americans working for a solid year to make as much money as one average CEO. It’s called the wage gap.”

2. But Hillary and Sanders, along with the AFL-CIO, like to compare the total compensation of a very small sample of only about 350-475 of the highest-paid CEOs in the US to the average annual pay for about 100 million hourly workers employed at private companies (small, medium and large companies), and some of those workers are part-time. Note that Hillary qualifies her claim of a 300-to-1 CEO-to-worker pay ratio by referring to “top CEOs.” It’s hard to know the exact number for sure, but many of those 100 million hourly workers don’t even work for one of the 350-475 companies headed by a “top CEO.” For example, think of an American working at a small hardware store in Kansas, a family-run restaurant in Montana or a small family-owned grocery store in Kentucky. What sense does it make to compare Apple CEO Tim Cook’s $10m salary to the annual pay of workers who work for those small companies?

Of course, when the average person hears from Hillary or Sanders that there’s a 300-to-1 “wage gap,” and thinks about 300 Americans working all year to equal the salary of one top CEO, many of them are understandably upset. So upset that they can easily be persuaded that something must be done, by Hillary and Bernie of course, to address the “problem” of “excessive CEO pay,” using the heavy hand of government force if they’re elected president.

But when you have a total workforce of 150 million Americans, and you look at 300-400 of the highest paid executives in the US at the head of large, multi-national corporations, and compare their average compensation to the annual income of the “average hourly worker,” including many at small and medium sized firms, why wouldn’t we expect a large “wage gap”? Just like you’d expect to find a pretty big “wage gap” if you compared the average annual income of America’s 100-200 highest paid athletes, or the average salary of the country’s 100-200 highest paid entertainers, musicians or celebrities to the $48,920 annual income of the average hourly worker. And yet we rarely hear complaints about “excessive athlete, musician, or celebrity pay.”

3. Then there’s the inevitable lamenting about how the “CEO-to-worker pay ratio” has increased so much over time. It was about 20-to-1 in 1965, and has grown over time to the current 300-to-1 ratio that Hillary and Bernie complain about. But why wouldn’t we expect the ratio to increase over time? The size of the US workforce has doubled since the 1960s from about 75 million to 150 million workers, so the top 350-500 CEOs have become a smaller and smaller minority of all workers as total payrolls keep increasing. And adjusted for inflation, the S&P500 Index has increased three-fold since the 1960s, meaning that the CEOs of today’s S&P 500 companies are managing firms that are many times larger than S&P500 firms in the past and therefore deserve greater compensation relative to the average worker. For example, the value provided by an average hourly worker at Target or McDonald’s hasn’t changed much in the last 25 years. But the CEOs of Target and McDonald’s today are managing retail and fast food giants that are many times larger than Target and McDonald’s in the early 1990s.

4. To put the size of the largest of today’s S&P500 companies into perspective, I posted last week on CD about how the market value of Apple’s stock at $521 billion is greater than the entire stock market of Brazil ($490 billion). Further, the combined market cap of Apple, Google, Microsoft, ExxonMobil and GE exceeds $2 trillion, and those five companies as a separate country would be the world’s 6th largest stock market. It’s not surprising that the CEOs of S&P 500 companies whose value is comparable to the market caps of the entire stock markets of other countries are highly compensated.

Bottom Line: It might be a little disingenuous and hypocritical for Hillary Clinton to complain about excessive CEO pay when her minimum speaking fee, reportedly $225,000 for a one-hour talk, is more than the $216,000 average annual CEO salary in 2014. We could say how unfair it is that the average CEO in America has to work a full year, 50 weeks full-time, to earn the same income that Mrs. Clinton earns in about 50 minutes giving a speech! How unfair! How immoral! Something must be done!

And if Bernie Sanders compares the pay for an average CEO to the average worker — i.e. compares “apples to apples” — and understands that the Average CEO-to-Average-Worker Pay ratio was only 4.4-to-1 in 2014, I’m not sure how he can call that an “immoral” outcome that must be “dealt with.” If Sanders wants to deal with some excessive pay that’s “immoral” maybe he should start with Mrs. Clinton’s excessive speaking fees before dealing with CEO pay. Or he might deal with the “immorality” that there are currently more than 60 NBA players who will earn $12 million or more this season, which is more than the average CEO of an S&P500 company earns!

The claim of a 300-to-1 ratio for CEO-to-worker pay made by Hillary, Bernie and the AFL-CIO gets my “Biggest Blindly Accepted Statistical Legerdemain Award.” Well no it’s actually a tie with the gender wage gap myth mentioned in the Hillary ad above and the perpetual and incessantly repeated “77 cents on the dollar” statistical falsehood.