When we consider all US CEOs and all US workers, the ‘CEO-to-worker pay ratio’ falls from 331:1 to below 4:1 | AEIdeas

When we consider all US CEOs and all US workers, the ‘CEO-to-worker pay ratio’ falls from 331:1 to below 4:1 | AEIdeas

Here are some questionable statistics about CEO pay that we learn about from the AFL-CIO’s Executive Paywatch webpage:

1. In 2013 the CEO-to-worker pay ratio was 331:1 and the CEO-to-minimum-wage-worker pay ratio was 774:1. America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while wages have stagnated and unemployment remains high.

2. Highly paid CEOs of low-wage employers are fueling this growing economic inequality. In 2013, CEOs of the S&P 500 Index companies received, on average, $11.7 million in total compensation, according to the AFL-CIO’s analysis of available data from 350 companies.

3. It doesn’t have to be this way. Politicians should raise the minimum wage. Corporations should pay their employees a living wage. And workers should have a collective voice on the job to demand their fair share.

MP: As I pointed out in a post earlier today on CD, this frequently cited AFL-CIO analysis of CEO pay is an example of “statistical bait-and-switch.” Or call it a “statistical canard” or a “statistical fallacy.” Here’s why:

The AFL-CIO is comparing: a) the average salary of a small sample (350) of the highest paid US CEOs, out of a total CEO population in 2013 of 248,760 CEOs, according to BLS data here, and b) the average worker pay for production and nonsupervisory workers, which represents only 8.5 million factory workers out of a total of 136.3 million payroll employees nationwide. In other words, the AFL-CIO’s reported “CEO-to-worker pay ratio” of 331:1 is calculated by ignoring 99.9% of all US CEOs and 93.8% of all US workers. A more accurate description would be to call it a ratio of the pay for 350 of the highest-paid US CEOs to the pay of only 6.2% of the American labor force, or a ratio of an unrepresentative, infinitesimally small, and statistically insignificant group of CEOs to a small minority and unrepresentative group of US factory workers. It’s a completely bogus and meaningless comparison.

The top chart above shows a more statistically valid comparison of CEO pay to average worker in the US pay by considering: a) the average annual pay of all US CEOs in every year from 2002 to 2013 (data here) and b) the average annual pay of all US workers in a comprehensive, national BLS dataset that includes workers in 22 major occupational groups, 94 minor occupational groups, 458 broad occupations, and 821 detailed occupations (132.6 million workers for 2013). Based on those data, the average CEO earned $178,400 last year, the average worker earned $46,440, and the “CEO-to-worker pay ratio” was 3.84:1, and that’s a LOT different from the AFL-CIO’s ratio of 331:1 by a factor of more than 86 times! Call it a “statistical falsehood-to-truth ratio” of 86:1 for the AFL-CIO’s exaggerated, bogus ratio. The chart also shows that the real CEO-to-worker pay ratio has not been increasing as is frequently reported, but instead has been remarkably constant over the last 12 years, averaging 3.8:1 in a tight range between a maximum of 3.89:1 in 2004 and a minimum of 3.69:1 in both 2005 and 2006. The ratio of 3.84:1 in the most recent year (2013) was actually slightly lower than the ratios in 2004 (3.89:1) and in all years between 2009 and 2012.

Likewise, the bottom chart displays a more statistically valid comparison of average CEO pay to the annual pay of a full-time minimum wage worker. In 2013, a full-time minimum wage worker earned $14,500, and therefore the CEO-to-minimum-wage-worker pay ratio was only 12.3:1 compared to the grossly inflated 774:1 ratio reported by the AFL-CIO. That’s a “statistical falsehood-to-truth ratio” of 63:1 for the AFL-CIO’s exaggerated ratio. Because of the recent increases in the minimum wage between 2007-2009, the CEO-to-minimum-wage-worker pay ratio in recent years has been lower than the most recent 12-year average of 12.76:1.

Bottom Line: Do a Google search of the phrase “CEO to worker pay” and you’ll find 150,000 links to reports and articles that almost exclusively compare the salaries of a very small, statistically insignificant group of S&P500 or Fortune 500 CEOs to average worker pay. I’m suggesting that those comparisons are statistically invalid and meaningless. A comprehensive and statistically valid comparison of the average pay of all US CEOs to the average pay of all US workersreveals a much different story than the frequently reported narrative of a 300:1 (or higher) and rising CEO-to-worker pay ratio in the US. The reality is that the annual salary of the average US CEO pay is less than four times the annual pay of the average worker, and that ratio has been remarkably stable for more than a decade.