CEO Pay Ratios

March 3, 2012 by David Cruz-Uribe

Update: While the following chart has gone viral, a more careful search has turned up significant questions about its veracity. See Politifact for more details. It is worth noting that two studies consulted by Politifact (one by the Institute for Policy Studies and the other by the Economic Policy Institute) confirm that the number for the United States is in the ballpark: CEO to worker pay ratios peaked above 500 to 1 around 2000, and currently are only 325 to 1 (in 2010).

From the blog Sociological Images:

From Catholic Social Teaching:

Other factors too enter into the assessment of a just wage: namely, the effective contribution which each individual makes to the economic effort, the financial state of the company for which he works, the requirements of the general good of the particular country…and finally the requirements of the common good of the universal family of nations…

Mater et Magistra (Mother and Teacher) #71 John Paul II, 1981

Some of these factors do not seem to have been taken into account when setting CEO salaries that yield a 475:1 ratio.

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Mark Gordon

Cue the usual suspects.
Dan

LOL. What complete and utter garbage. If the average income is $30,000, that means the average CEO makes almost $15 million. Most of the Fortune 500 CEO’s don’t make that kind of compensation. Let alone the average CEO of an average mid-sized firm.
- David Cruz-Uribe, SFO
  
  Dan, you may be over estimating mean income. The median household income (which includes many two income families) is only about $31,000. So I suspect that average wages for employees at companies is a lot lower than $30K. A brief search did not turn up data for mean income or information on variance or distribution, so I can’t say more. Please feel free to provide quantitative data to support your point.
  - Dan
    
    Really not too hard to find. The US census bureau has a lot of information on this type of stuff:
    
    http://www.census.gov/hhes/www/income/data/statemedian/index.html
    http://quickfacts.census.gov/qfd/states/00000.html
    
    “Per capita money income in past 12 months (2010 dollars) 2006-2010 $27,334. Median household income 2006-2010 $51,914
    
    Here’s a report from 2009 on the top 20 highest paid CEO’s in the fast 100 growth companies. Notice that after the top handful, it drops dramatically.
    
    http://money.cnn.com/magazines/fsb/fsb100/2009/rich_execs/
    
    My estimate is relatively accurate – at least enough to illustrate my point.
    
    Even so, my practical experience in this space indicates that the ratio of CEO pay to worker pay is considerably less than you think. Between 5:1 and 10:1 is closer to the average if you take the Fortune 500 out of the picture. (Not saying that’s fair either – I think 10:1 is still an issue). The problem is that the Forturne 500 skew the numbers upward so much that it paints an inaccurate picture of the average case scenario. For example, see the ridiculous numbers at the following link to see what I mean:
    
    http://www.forbes.com/lists/2011/12/ceo-compensation-11_land.html
    
    I’m a CEO and some of my staff make more than I do. This is not uncommon in my peer group of other CEO’s.
  - David Cruz-Uribe, SFO
    
    Dan, out of curiosity, what is the ratio between your salary and the mean (average, not median) salary of all employees excluding you and your top management group (senior VPs or however you care to define your inner circle)?
John Henry

CEO is disproportionately high. I suppose we could pass laws to cap CEO pay, and that would create a more just ratio between CEO and average employee pay. I would support them (although my guess is that other forms of compensation, like perquisites, corporate private jet use, corporate ‘retreats’ in various locations, etc. would increase). I guess the part I don’t get is why people are so fixated on this: CEO compensation, even at current exorbitant levels, is a minor expense for corporations and even distributing the CEO’s salary among all the workers would have very little effect. These types of complaints have always seemed to me to be more about symbolism and resentment than justice (and possibly critiques of the rationality of ‘free’ markets)…so what am I missing?
Bryce Laliberte

There’s many things that strike me as worth questioning about this image, and considering I can’t find any of the data used to present this, I can’t accept it until I see what that data is. I’ll save the other issues for another time.

However, even assuming this image to present something reflecting reality, I find your comment bewildering. Just how do you know how much any individual’s work is worth? How do you know what their income ought to be that they may consume/invest with it as they see fit? Have you been given some divine knowledge? Do you style yourself an omniscient econometricist who could successfully engage in central planning? Just how strongly would you ground your claim in your ascertaining how much an individual’s work is worth?
- David Cruz-Uribe, SFO
  
  Well, one argument is that the “market” has determined that CEOs in Europe are apparently worth a lot less than in the US, in relative terms. This could be because: a) American CEOs do a better job, or b) Europeans pay much higher average wages than the US. Since I see no evidence that European companies are less competitive or more poorly run than American companies, it would seem that (b) is a plausible answer. So maybe the real answer is that American workers at all levels except the very top are poorly paid compared to their bosses. Since, by Catholic social teaching, this is one criterion for judging how well a company is being run, I think that is is a reasonable metric for concluding that American CEOs are overpaid.
  - Bryce Laliberte
    
    I’m not interested in that (for the moment; I’ll make a longer reply at some point). My only question is how you figure you have the knowledge that American CEOs are overpaid, or that the average worker is underpaid. How do you know how much an individual’s labor is worth?
    
    Let’s just suppose a kind of scenario. I run a company by myself, working from home as a top level advisor to big companies. I make $10 mil a year. In order to help me with my work, I hire a secretary, who I pay $50,000 a year. She is my only employee.
    
    Does the fact that the ratio between CEO and worker in my company is 2000:1 tell you that I am overpaid or that my secretary is underpaid?
    
    If the ratio doesn’t tell you, then what does tell you that someone isn’t paid enough/too much?
  - David Cruz-Uribe, SFO
    
    Extremal cases only show the danger of reckless generalization.
    
    Catholic social teaching provides clear standards for judging if an employee is properly compensated; by this measure, many workers in America are not fairly paid. This metric has very little to do with “economics” as currently and narrowly defined, and a great deal to do with notions of justice and the universal destination of goods. At the other end of the spectrum, it seems to me that CEO compensation is not above their worth but has become a marker in a game of power and prestige: behavior that Catholic moral theology views skeptically at best.
    
    Perhaps you will find this a meaningless comparison, but after many years of schooling and hard work, I have reached a fairly lofty position in my chosen field. I am well paid by any metric but my pay is not comparable to the pay of any CEO, and I make perhaps 5 times what the LOWEST paid, full time employee at my school makes. Even the highest paid faculty members probably lie within 10 times the lowest paid employee. I would prefer that our lowest paid employees were paid more, and have militated for this: their dignity and livelihood is more important than a few extra dollars for someone who is already well compensated.
  - Rodak
    
    It never fails to amaze me how we tend to bend over backwards to make certain that we’re being fair to those who, at least in a material sense, have nothing to worry about. Meanwhile, those constantly struggling to make ends meet are accused of demanding “entitlements.”
Rodak

American Exceptionalism at its most definitive.
Blackadder

The chart isn’t right. But suppose for a moment it was. In that case, wouldn’t we have to conclude that looking at the ratio of average pay to CEO pay is not a good way of determining a nation’s well-being. According to the chart, the disparity between the average worker and CEO is ten times as great in the U.S. as it is in Mexico. Does that mean that the average worker is better off in Mexico than in the United States? Clearly not.
- grega
  
  Funny you pick Mexico and not Germany or Japan.
  And yes the average worker in Germany is better off.
  - Blackadder
    
    grega,
    
    I picked Mexico and the United States because it is a clear example of how looking at the ration of CEO pay to worker pay tells you nothing about the state of a society. I could have picked Canada and South Africa just as easily.
Frank M.

Interesting post, interesting comments.

Based on the story at Politico (following the link David added), it looks to me as though the students who originally compiled the chart didn’t think the “actual” ratios were severe enough to draw the attention they thought appropriate. If, as Politico suggests, the US ratio may be as low as 185:1, what does it say if this isn’t high enough to achieve the desired shock value.

There are multiple absurdities here: First, that 185:1 isn’t already high enough to ensure some examination of values, some questioning of “what’s really going on here?” Second, that anyone would argue about what the actual ratio is, when any of the likely “real” ratios are obscenely disproportionate and the product of obvious cronyism. Third, the idea that “justice,” especially in the Christian sense, has only to do with outcomes, incomes or econometric proportion. Fourth, that this issue could be legislated away by capping CEO compensation, without addressing the underlying value system that makes inequality of income and opportunity seem acceptable.
- David Cruz-Uribe, SFO
  
  Well framed, Frank.
Morning’s Minion

John XXII, Mater Et Magistra, 1961 – but very valid point! But you could just as easily quote John Paul II’s Laborem Exercens – best way to achieve universal destination of good is by just wage!
Jim Lein

1%/99% economies don’t last long. Look what happened in 1929. Then we got a better balance and things went relatively well for over 50 years, creating the middle class. Then regs were cut and we moved back to the 1%:99% ratio and the bottom fell out again in 2008. Yet many say keep it at 1%/99% or even .1%/99.9%, what the heck. What could go wrong?

It’s not a functioning economy if almost all wealth is funneled to a small percentage of the people. Another way 1%/99% economies end, of course, is revolution. Either way, they don’t last long. They are not sustainable.