New headline from Economic Policy institute “CEO compensation has grown 940% since 1978 while typical worker compensation has risen only 12% during that time,” stinks of yet another attempt to invoke populist envy and propagate the wealth inequality narrative.
The conclusions of Economic policy institute are however rather dubious for several reasons, and their attempt to inflate CEO pay numbers is transparent. Here are a few problematic issues with their analysis.
The year 1978 as the comparison date: If you have previously read studies claiming large increases in CEO pay, one thing you notice is the consistent use of 1978 as the comparison date. Whether the study is published in 2000, 2011, or 2019, they all seem to be comparing CEO pay before and since 1978. They would claim that 1978 is the year when they start to notice a higher rate of growth for CEO pay. However, this should be of no surprise, as the rules for reporting CEO compensation changed during that year to include equity, such as stocks and dividends. Thus 1978 is a very convenient year for a before and after comparison, especially if your goal is to inflate the perception that CEO pay has risen exorbitantly.
Using top 350 firms as the measure for CEO pay: Using only the top 350 CEOs in the country and pitting them against all typical workers seems rather unfair. Top 350 CEOs most likely do not accurately represent the CEO pay for a country at large. Economic policy institute reports that the average CEO pay for year 2017 for the top 350 firms was $14,000,000. On the other hand, the average pay for a typical CEO in the US was $350,622 for the same year.
Using stock market high to calculate CEO pay: By using the year 2017 to measure CEO pay the study is effectively using the stock market high. Given that majority of CEO compensation is now tied to the stock market’s performance, it should be of no surprise that a rise in the stock market has also increased the CEO compensation. The stock market is very volatile, and as a result so is CEO compensation levels. It is actually quite common for CEOs to see negative compensation. If for instance, you would use the year 2002 rather than 2017 as the data point, you would find that 40% of CEOs actually lost money.
Understating the typical worker compensation: Only a 12% rise in compensation since 1978 for a typical worker is a concern in it self, without even looking at the CEO numbers. Again however, as other studies that have claimed a low rise in income for middle or lower class workers, this study understates the numbers by only looking at wages. Since 1978, total compensation has moved away from wages, and has included a number of benefits such as healthcare, and guess what, equity sharing. Why exclude other forms of compensation for “typical workers”, while including them for CEOs? I mean even Walmart cashiers can be part of equity sharing accounts these days. It seems to me Economic policy institute have already made their conclusions, and are just fitting the numbers to match their narrative.
