CEO Pay

Every year a new report comes out on CEO pay, and it tends to call out the discrepancy between CEO compensation and their employees. The question it begs is how reflective of the overall market is the data being shared? The answer is not as simple as you might think.

Articles like this one and this one, share statistics and data from the annual study which looks at pay data for 340 executives and S&P 500 companies. For example, the first article leads with the following statistics:

  • The total median pay package for chief executives at S&P 500 companies rose to $12 million last year.
  • The number — which includes salary, stock, bonuses and other compensation — is 7% higher than it was in 2017, for an average pay hike of $800,000 for large-company CEOs.
  • The median pay increase for the typical worker at an S&P 500 company grew just 3% last year, or less than half the rate that the top boss enjoyed.
  • It would take 158 years for the typical worker at most big companies to make what their CEO did in 2018.   

The second article takes a very opinionated approach, “After years of kicking and screaming, corporate executives have finally released pay data on what their CEO makes versus their median worker. Unsurprisingly, the gap is obscene. The average chief executive of an S&P 500 company earned 287 times more than their median employee last year, according to an analysis of new federal data released Tuesday by the AFL-CIO labor federation. America’s CEOs earned a staggering $14.5 million in 2018, on average, compared to the average $39,888 that rank-and-file workers made. And CEOs got a $500,000 bump compared to the previous year, while the average US worker barely got more than $1,000.”

These articles are click bait to drive traffic to their websites. However, they don’t look at the broader data available to see where the majority of companies fall on the CEO to employee pay ratio. The study that is shared by The Economic Policy Institute annually focuses on 350 of the biggest companies in the United States. As you can guess, the pay of these high profile CEOs has little in common with CEOs of typical sized US companies.

Forbes notes that, “Government statistics on worker pay tell us that for all 210,160 CEOs in the national Occupational Employment Statistics (OES) database from May 2017, the average CEO receives $196,050 in annual wages. If we took out the highest paid CEOs from EPI’s report, that average would drop.”

“That’s barely more than 1% of the $18.9 million for the particularly high-paid CEOs in EPI’s report. In fact, the ratio of the top 350 CEO’s pay to average CEO pay is 96:1. Most CEOs have more in common with average workers than with high-flying CEOs making $18 million per year.”

The full data set is a far more realistic picture of the relationship between CEOs and their employees. If you assume the same level of pay for employees that is stated in the EIP study of $39,888 with the OES data on overall CEO pay, the actual gap is less than 5X. Far less than the 287X heralded across the headlines. 

Another issue that is glossed over in the click bait articles is the lack of correlation between worker pay and CEO pay. The Forbes article points out, “…we find that for all occupations, workers earn an average of $50,620 which totals $7.2 trillion given the 142.5 million workers included in the database. The 210,160 CEOs earned a total of $41.2 billion thanks to their $196,050 average salary. 

If we do the math, we find that CEOs captured a “whopping” 0.6% of all wages. If we took all salary away from all CEOs in America (not just the highest paid ones), and distributed it among all other workers, we other workers would each receive an additional $46 a year. In other words, all the CEOs in the entire country collectively are getting paid so much money that they are costing us ordinary Americans less than $1 per week.”

CEOs work hard and shoulder a lot of responsibility, especially in a time of technology transformation that is affecting every industry. Their roles include managing business strategy, creating a positive culture, navigating an evolving workforce, retraining existing workers to handle new skills that didn’t exist a decade ago, and managing board expectations.

It’s fair to say they are worth the 5x increase in pay compared to their employees average salary. And the reality is, CEO pay is just not a meaningful factor in determining employee pay. Simple economics dictate worker pay, and that excessive CEO compensation is accounted for by shareholders, not employees’. 

If you have questions on C-suite compensation or want to learn more about fair and equitable compensation structures, send us note.