What accounts for this huge discrepancy? The SEC is to blame. The AFL-CIO—as well as most economists and reporters—relies on the SEC-sanctioned estimates of senior-executive stock-based pay that each company reports in the Summary Compensation Table of the proxy statement that it files annually with the SEC, the federal agency whose mission is to protect investors. Curiously, that figure, the “estimated fair value” of executives’ stock-based pay, or EFV, is featured much more prominently in companies’ SEC filings than the figure indicating their actual realized gains, or ARG, on stock-based pay. ARG is a figure that permits the calculation of senior executives’ actual take-home pay—the number they report in their personal-income tax filings with the Internal Revenue Service.

The AFL-CIO is by no means alone in using EFV when it could and should be using ARG. For example, the annual compensation figures for hundreds of CEOs published earlier this year by The New York Times and The Wall Street Journal report total compensation based on the EFV measures of stock-based pay. (The Atlantic has reported on statistics based on similar estimates, too.) The problem is that, on average, for the highest-paid executives, pay estimates that include EFV are far lower than those that include ARG, especially when the stock market is booming. We aren’t the first to point out discrepancies like this, and even such a mainstream institution as the Federal Reserve is aware of them. Earlier this year, for example, two researchers at the Richmond Fed published a report demonstrating how the two measures of pay can diverge.

In 2014, the latest year for which ExecuComp has full data, the average total EFV compensation of the 500 highest-paid executives named on SEC filings (as ranked by total EFV compensation) was $19.3 million, with 62 percent of that attributable to stock-based pay. But the average ARG compensation of the 500 highest-paid executives (as ranked by total ARG compensation) was $34.3 million, with 81 percent of that coming from stock-based pay. As we document in detail in a report issued late last month, total ARG compensation was greater than total EFV compensation in every year from 2006 to 2014, with the largest differences occurring when prices on the stock market were on the rise.

Executive Pay: Two Different Measures, Wildly Different Results

Year to year, ARG compensation rose and fell significantly with the S&P 500 Index, whereas EFV compensation remained relatively flat. The correlation of ARG with stock-price movements makes intuitive sense because an executive’s ARG depends on the number of shares that he or she receives from exercising options and the vesting of awards, which is multiplied by the company’s stock price on the particular days that he or she chooses to exercise options and on which award-vesting restrictions are met. So, in any given year for any given executive, EFV, which is based on newly vested options and awards, may be higher than ARG. But when a company’s stock price rises rapidly, ARG will tend to outstrip EFV.