“Lies, Damned Lies, and Statistics.”
Attributed to Mark Twain
This morning, at 5:30 am ET, the Wall Street Journal dropped an article by a Jon Sindreu on its website entitled: “Inequality Isn’t Shareholders’ Fault, But They Can Help Fix It.” The subtitle was: Increase in wealth gap seems to have more to do with managerial pay than corporate profits, creating opportunities for do-good investors. But, hey, we already knew that already, right? We have been hearing about how fat cat CEO types have been living ‘high on the hog,’ putting their thumb on the average worker, and all that jazz for quite a while now. In fact, we kind of accept it as a given, don’t we?
Let me give you how the article started: ”Investors who want to do good while still doing well shouldn’t worry too much about high levels of corporate profit. They should worry about exorbitant executive pay.” Whew. That is about as bold a statement as you can get.
To be certain, manager pay at a lot of large publicly traded companies is a little jaw-dropping. Of course, the headline numbers almost always include incentive-based pay and things like options (which could eventually be worthless). However, the numbers are still huge, no matter how you qualify them. Please note, I used the phrase large, publicly traded companies and emphasized the word large for a reason.
For his article, Sindreu used research from a think-tank named the Economic Policy Institute (EPI). On its website, the organization describes itself as: “The Economic Policy Institute (EPI) is a nonprofit, nonpartisan think tank created in 1986 to include the needs of low- and middle-income workers in economic policy discussions… EPI proposes public policies that protect and improve the economic conditions of low- and middle-income workers and assesses policies with respect to how they affect those workers.” www.Epi.org/about
The last sentence of that paragraph clearly states what the EPI’s agenda is. Knowing this already, I wanted to determine the criteria it used in its research. I mean, if we should worry about exorbitant executive pay, shouldn’t we know exactly what we are talking about? Fair enough, and here goes the explanatory fine print https://www.epi.org/publication/ceo-compensation-2018/?mod=article_inline:
“CEO average annual compensation is measured for CEOs at the top 350 U.S. firms ranked by sales…include(s) salary, bonus, restricted stock awards, and long-term incentive payouts for CEOs.”
Fair enough. It uses data for the CEOs of some of the largest companies in the US, and, therefore, the world. There is nothing wrong with that. However, what should you make of the title of the EPI’s research report? It is: “CEO compensation has grown 940% since 1978.” That reads a little differently than Top 350 CEOs compensation, at least it does to me. Unfortunately, there is no mention of this in the Wall Street Journal article. In fact, I pulled up a few other articles which used this same research report, and, interestingly enough, none of them clarified the sample size…which is pretty small, really.
So, I went to the US Bureau of Labor Statistics (BLS) to find out just how many CEOs there are in the United States, and what the government says their wages are. Maybe that could/would/should be a better apples to apples comparison than simply using the largest 350 companies and implying it to be indicative of CEO pay throughout the entire economy? Perhaps.
https://www.bls.gov/oes/2018/may/oes111011.htm
If you click on the URL above, it will take you to something called ‘Occupation Employment and Wages, May 2018 for the 11-1011 occupation code (Chief Executives). In it, the BLS estimates there were 195,530 individuals with the title Chief Executive in May 2018. It further estimates the mean hourly wage was $96.22/hour and the mean annual wage was $200,140. That is the mean, or the average. The median, the CEO pay smack dab in the middle, was $91.15/hour of $189,600 per year.
When you consider there were something like 3,671 domestic companies listed on US stock exchanges at the end of 2017, according to the WSJ, you can intuit that a lot of the 195,530 CEOs in the country don’t have the sweet compensation package those top 350 have, what with the all options and restricted shares and the like. To be sure, there might be some of that, just not to the same level. After all, the potential bonus pool is simply bigger in absolute size the larger the company is.
Now, going back to the EPIs stated mission: “… EPI proposes public policies that protect and improve the economic conditions of low- and middle-income workers and assesses policies with respect to how they affect those workers.” Which of the following would pack a bigger punch or make a stronger argument for its agenda: “CEO compensation has grown 940% since 1978 and is 278.1x times the wage of the average worker” or “The BLS estimates median US CEO pay is roughly 3.15x times US per capita Gross National Income”?
Again, there is nothing necessarily wrong with either methodology. They are what they are. So, let me ask you, which is the better or more appropriate of the two to use when discussing CEO pay relative to the rest of the workforce? You answer could be like mine: well, it kind of depends.
You see, I would have no problem with the EPI’s research if it did something like track S&P 500 CEO pay, or some other established, recognizable stock index. Perhaps the Russell 1000 or 3000 might be a good fit. Maybe the S&P 100 would fit the EPI’s needs, and I suspect it would.
Further, I think it would be a good idea to clarify the definition of wages or pay. You see, stock options make a good portion of CEO pay at publicly traded companies. Those can be worth $0 at any given time, even if the company has to expense them at some valuation. Also, it is probably a good idea for ALL shareholders to have a CEO with a meaningful personal equity stake in the company. So, explaining the intricacies of CEO pay, like what is cash and what isn’t, would also make the conversation more meaningful.
This is important if income and wealth inequalities are going to be societal topics moving forward. Simply throwing a number out and proclaiming it CEO pay without describing the methodology used is perhaps a little misleading. If not misleading, I might argue it is not the most factually accurate. Then, again, I play with numbers quite a bit, and I know how you can make them ‘say’ what you want them to ‘say.’ That is why I am more persnickety than the average person when I hear or read something that, at first blush, seems hyperbolic, too good to be true, or amazingly unfair.
In the end, and during this election year, you will need to sort through the grand pronouncements and dizzying data to determine the true story. It often isn’t exactly what the headline, writer, or politician would lead you to believe.
Have a great weekend.
John Norris
Chief Economist
Managing Director
As always, all opinions expressed in this newsletter are mine and mine alone. They don’t necessarily reflect the views of Oakworth Capital Bank or any other individual associated with the company. As my wife will tell you, I am prone to change my mind without warning. Finally, nothing in here should be construed or otherwise considered an offer to buy and/or sell financial services/products of any type.