The CEO - wage earner gap debunked

Mark Perry at the American Enterprise Institute explains:

The nation’s largest labor federation reports this year that the typical CEO running an S & P 500 firm received total compensation of $12.4 million in 2015 while the average rank-and-file worker was paid just $36,875 — a pay gap of 335-to-1.

But the AFL-CIO can only get such an inflated pay ratio by applying a series of statistical sleights of hand that result in an invalid apples-to-oranges comparison of the total compensation for CEOs to the cash wages of mostly part-time workers.

To start, the AFL-CIO only considers a very small sample of S&P 500 CEOs to get its 335-to-1 ratio. Using a larger, more representative sample of CEOs produces a much smaller pay gap.

For example, the AFL-CIO’s own website reveals that the average CEO compensation of Russell 3000 companies was $5.7 million last year, which would cut the 335-1 ratio by more than half to only 155-to-1.

Further, BLS data show that there are actually more than 20,000 chief executives employed nationally who “manage companies and enterprises” at an average annual salary of $220,700. For that more comprehensive group of America’s CEOs, the CEO-to-worker pay ratio drops to only 6-to-1.
Then there’s the issue of average pay for rank-and-file workers. The AFL-CIO reports an annual pay figure of $36,875 in 2015 for the “average nonsupervisory worker,” but doesn’t provide any additional details.
Here are the details not provided by the AFL-CIO.
The $36,875 annual average worker pay for the 99 million “production and nonsupervisory employees” is based on an average hourly wage of $21.04 for rank-and-file workers in 2015, an average workweek of only 33.7 hours for those workers, and an assumption of 52 weeks of work per year. That’s how the AFL-CIO gets its reported annual pay for the average U.S. worker: $21.04 per hour x 33.7 hours per week x 52 weeks = $36,875.

So every year, to get the highest possible pay ratio, the AFL-CIO does a statistically deceptive comparison of the total compensation for only 500 CEOs who are working full-time and in their prime earning years to the cash wages only for 99 million rank-and-file workers who are mostly part-time workers. But you would never know that from the AFL-CIO’s website because the details of average worker pay are never fully explained. 

How would the AFL-CIO’s outsized pay ratio change if we considered total compensation for both CEOs and full-time rank-and-file workers? To make the comparison as accurate as possible, let’s consider rank-and-file employees working a 50-hour week (even though most CEOs probably more than 50 hours a week) and receiving fringe benefits equal to 46% of their cash wages, which is the current estimate from the BLS for all workers.
The total annual compensation for rank-and-file workers would be nearly $72,000 and would result in a CEO-to-worker compensation ratio of only 172-to-1. In other words, the AFL-CIO’s reported CEO-to-worker pay ratio is inflated by a factor of almost two times by comparing the total compensation of CEOs to the average cash wages for part-time workers.
Beyond the statistical chicanery used to generate an inflated pay ratio, what’s the point of the AFL-CIO’s annual reports on CEO pay? The AFL-CIO tells us that although America is supposed to a land of opportunity, the rising CEO-to-worker pay gap means that “corporate CEOs have been taking a greater share of the economic pie” while wages have stagnated for the average worker. The message is that if CEOs weren’t being so generously compensated then rank-and-file workers would be making higher wages rather than getting only the leftover scraps.

Let’s do a little experiment: The S&P 500 CEOs received $6.2 billion as a group in total compensation in 2015. If the AFL-CIO could confiscate that entire amount and redistribute it to the rank-and-file workers, how would that affect average worker pay? 

Each of 99 million rank-and-file worker would receive an annual increase in pay of only $63 before taxes, or about 3.6 cents more per hour. In other words, complete confiscation and redistribution of S & P 500 CEO compensation would make almost no difference in pay for rank-and-file workers.
It’s not that surprising that the AFL-CIO would engage in an apples-to-oranges comparison to produce the highest possible CEO-to-worker pay ratio possible in its role representing union workers.

But, of course, a comprehensive look at facts doesn't have the sex appeal of a class-struggle-narrative sound bite.