As I reported recently on CD, there are a number of statistical problems with the methodology used by the AFL-CIO to calculate its annual “CEO-to-worker pay” ratio, which was 373-to-1 in 2014, up from 331-to-1 in 2013. Obviously, as a federation of 56 trade unions representing 12.5 million active and retired union workers, the AFL-CIO has an incentive to report the highest possible “CEO-to-worker pay” ratio. How to do that? Very easy: a) report the very highest possible estimate of CEO pay available and b) report the very lowest possible estimate of worker pay.
1. Lowest Worker Pay. Even though the AFL-CIO represents union members, it uses average worker pay for all workers, not just union members. For example, to get a 331-to-1 CEO-to-worker pay ratio in 2013, it compared the total compensation of 350 of the highest paid CEOs in the S&P 500 ($11.7 million) to average annual worker pay of $35,239. To calculate that average worker pay, the AFL-CIO used the average hourly wage of $20.14 in 2013 for production and nonsupervisory workers and the average workweek of 33.7 hours for those workers: $20.14 per hour x 33.7 hours per week x 52 weeks = $35,239 annual worker pay. And as I reported here, the AFL-CIO is actually reporting the annual cash wages for part-time workers, not full-time workers (less than 35 hours per week is part-time according to the BLS).
If the AFL-CIO has used the average annual pay for all full-time private workers of $44,617 in 2013, the CEO-to-worker pay ratio would have decreased by about 21% from 331-to-1 to 262-to-1, and if it had used the average annual union pay of $49,400, the ratio would have fallen further to 237-to-1, a decrease of 28.4%.
2. Highest CEO Pay. As I also pointed out in my previous post, the AFL-CIO compares total CEO compensation (base pay plus bonuses, profit-sharing, stock or option awards, etc.) to the average cash wages of workers, and not total worker compensation (including fringe benefits, profit-sharing, retirement/pension, etc.). That comparison of CEO compensation to worker cash pay is another method used by the AFL-CIO to report the highest possible CEO-to-worker pay ratio. Another tactic used by the AFL-CIO is to use only a very small sub-set of only the very highest paid CEOs.
For example, in 2013 the AFL-CIO included only 350 of the highest paid CEOs among the S&P 500 companies, and it reported the average CEO compensation, not the median CEO compensation – another tactic used to report the highest possible CEO pay number. As the chart above shows, the median CEO compensation for all S&P 500 companies in 2013 was $10.1 million (according to Equilar’s “2014 CEO Pay Strategies Report“), which was $1.6 million (and 13.7%) lower than the AFL-CIO’s reported $11.7 million CEO average compensation. Using the median compensation for all S&P 500 CEOs reduces the AFL-CIO’s ratio by more than 13% from 331-to-1 to 287-to-1.
Further, to report the highest possible CEO pay, the ALF-CIO considers only the CEOs of large-cap S&P 500 companies, which are America’s 500 largest, well-established companies with market capitalizations above $5.3 billion. Ignored by the AFL-CIO are the CEOs of America’s S&P 400 Mid-Cap companies (market capitalization of $1.5 billion to $5.9 billion) and 600 S&P Small-Cap companies (market capitalization of $400 million to $1.8 billion). The chart above shows the median CEO salaries and the CEO-to-worker pay ratios for those two groups: $4.9 million median salary and CEO-to-worker pay ratio of 139.5-to-1 (99.4-to-1 for union workers) for the S&P MidCap 400 companies and $2.7 median salary and ratio of 76.7-to-1 for the S&P SmallCap 600 companies (54.7-to-1 for union workers).
For all 1,500 companies in the S&P 1500 (includes the S&P 500, S&P MidCap 400 and S&P 600 Small Cap indexes) the median CEO salary in 2013 was $4.96 million, and the CEO-to-worker pay ratio was 140-to-1, less than half of the AFL-CIO’s reported ratio of 331-to-1. For the AFL-CIO’s membership, the CEO-to-union worker pay ratio for the S&P 1500 would be only about 100-to-1.
Bottom Line: As the chart above shows, the CEOs of America’s largest companies in the S&P 500 get paid about twice as much on average ($10.1 million) as the CEOs of mid-size companies ($4.91 million), the CEOs of mid-size companies get paid about twice as much as CEOs of small-cap companies ($2.7 million). By only considering a sample of large-cap S&P 500 companies (and not all 500 companies), while ignoring the CEOs of mid-size and small-cap companies, the AFL-CIO can greatly exaggerate its annual CEO-to-worker pay ratio. As I’ve reported previously, if the AFL-CIO considered the average pay of all 21,550 chief executives running companies in America ($216,100 in 2014), the CEO-to-worker pay ratio in 2014 would be 6-to-1 (and 4.3-to-1 for union workers). The only way the AFL-CIO can get an inflated CEO-to-worker pay ratio of almost 400-to-1 (for 2014) is to engage in questionable methodology that compares the average (not the median) total compensation of a tiny group of the country’s very highest-paid CEOs who head America’s largest companies to the cash wages of about 100 million mostly part-time workers. While that shady methodology does generate a lot of sensationalized media attention, it also creates a pretty high ““statistical misrepresentation-to-truth ratio.”
from AEI » Latest Content http://ift.tt/1RZ6x96
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