Michael Saltsman and I have an op-ed in today’s WSJ titled “About That CEO/Employee Pay Gap“:
Income inequality is a key theme of Democrats’ 2014 re-election strategy, and the nation’s chief executive officers are an easy target. Before retiring to their districts for the fall, the House Democratic Caucus rallied behind the CEO/Employee Pay Fairness Act, which would prevent a public company from deducting executive compensation over $1 million unless it also gives rank-and-file employees raises that keep pace with the cost of living and labor productivity.
Meanwhile, the AFL-CIO and its aligned think tanks have made hay of the huge difference between the pay of CEOs and employees. One of the most widely cited measures of the “gap” comes from the AFL-CIO’s Executive Paywatch website. The nation’s largest federation of unions laments that “corporate CEOs have been taking a greater share of the economic pie” while wages have stagnated for the rest of us. As proof, it points to a 331-to-1 gap in compensation between America’s chief executives and the pay of the average worker.
That’s a sizable number. But don’t grab the pitchforks just yet. The AFL-CIO calculated a pay gap based on a very small sample—350 CEOs from the S&P 500. According to the Bureau of Labor Statistics, there were 248,760 chief executives in the U.S. in 2013. The BLS reports that the average annual salary for these chief executives is $178,400, which we can compare to the $35,239-per-year salary the AFL-CIO uses for the average American worker. That shrinks the executive pay gap from 331-to-1 down to a far less newsworthy number of roughly five-to-one.
Of course, it’s true that some chief executives heading large multinational companies do command impressive seven- or eight-figure compensation packages. But the data don’t support the rhetorical claim that this slice of the “economic pie” is what’s driving stagnant pay for others on staff. Consider Yum Brands, the parent company of well-known fast-food brands like Pizza Hut, Taco Bell, and KFC. The compensation of the company’s five-member executive team has been a point of contention for the Service Employees International Union-backed fast food protests that have occurred periodically over the past two years. Filings with the Securities and Exchange Commission put the total pay package for the company’s executive team at $30.7 million.
That might seem like a lot of wealth the company could “share.” But like many service-industry employers, Yum Brands has a lot of people to share it with. The company’s 2013 annual report indicates that it employs 539,000 people, 86% of whom work part-time. If the executive team were able to redistribute 25% of their salaries, incentive pay and stock options to these part-timers, the net impact on hourly pay would be just over a penny-per-hour raise before taxes. Even if the executive team took a 100% pay cut and distributed the money equally to the company’s 463,000 part-timers, hourly wages would only rise by five cents [before taxes].
The point is not that CEOs deserve more money, or less. If an executive is underperforming, the corporation’s board can and should adjust his pay appropriately or terminate his employment. And if the CEO is making the shareholders rich, the board might increase his compensation. But neither voters nor policy makers should make poorly informed decisions about redistributive public policies based on a faulty understanding of how much executives are paid and why entry-level employees aren’t paid more.
MP: As I calculated in this recent CD post, you could confiscate 100% of the compensation of all US CEOs in the S&P 500 last year and then redistribute that $6 billion of executive compensation to America’s 94.5 million middle-class workers, and the average worker’s income would only increase by about $1 per week – and that’s before taxes. Also, as my AEI colleague Alex Brill pointed out on Twitter, the CEO-to-worker pay ratios for the highest paid officers of the AFL-CIO are much higher than average: 8.5-to-1 for president Richard Trumka (based on his 2013 salary of $298,542) and 10.5-to-1 for executive vice-president Arlene Holt-Baker (based on her 2013 salary of $368,652).