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Every time CEO salaries are reported for S&P 500 companies, there’s always a lot of hand-wringing and criticism of “excessive CEO compensation,” along with the inevitable comparisons of rising CEO salaries to stagnant pay for average workers, and how that contributes to rising income inequality and an increasing concentration of wealth for the top 1%, etc. In about a month, we’ll hear the annual lamenting from the AFL-CIO about skyrocketing pay for a small group of the nation’s highest paid CEOs, America’s income inequality crisis resulting from corporate CEOs taking all of the wage increases while giving nothing to rank-and-file workers, and how the pay gap between CEOs in the S&P 500 and the typical American worker has widened to some ratio like 373-to-1 (as the AFL-CIO reported last year, see “CEO Pay Continues to Skyrocket”).
We can get a more accurate and complete picture of CEO compensation by looking at wage data for all CEOs, not just a small handful, just released by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2015. The BLS report provides “employment and wage estimates by area and by industry for wage and salary workers in 22 major occupational groups,” including the category “chief executives.” In 2015, the BLS reports that the average pay for America’s 238,940 chief executives was only $185,850. Looking at a smaller group of “chief executives,” who according to the BLS manage “companies and enterprises” (a group that is more comparable to the S&P500 CEOs than all “chief executives”), the 20,620 CEOs in that category earned an average salary last year of $220,700 (data here). Whereas most comparisons of CEO pay to average worker pay only consider the CEOs of the S&P 500 companies (or 2.4% of the total reported by the BLS), this larger sample of more than 20,000 CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”
The chart above shows the annual ratio of average CEO pay for the more than 20,620 CEOs who head companies and enterprises to the average annual pay of full-time workers based on BLS data for all occupations. For 2015, the average CEO earned $220,700 and the average full-time worker earned $48,320 (data here), for an Average CEO-to-Average Worker Pay ratio of only 4.56-to-1 – the same as the previous three years, and actually slightly lower than the peak ratios of more than 4.6-to-1 in both 2010 and 2011.
For the sample of 20,620 CEOs reported by the BLS, their average pay increased only 2.1% in 2015, from $216,100 in 2014 to $220,700 in 2015. In contrast, BLS data show that the average pay of all full-time workers increased by the same 2.1% last year to $48,320 from $47,320 in 2014. Therefore, the average worker last year saw an increase in their pay that was exactly the same increase in pay for the average CEO. Over the last decade, the average annual increase in CEO pay of 3.3% is only slightly higher than the average annual increase of 2.5% for workers in all occupations.
In contrast to the more sensational reports we’ll hear about in May from the AFL-CIO, there’s no “skyrocketing of CEO pay” when we consider all CEOs, and the Average CEO-to-Average Worker Pay ratio is less than 5-to-1, nowhere near the 400-to-1 ratio the AFL-CIO is likely to report in a few months for a small, elite group of CEOs that excludes 97.6% of all CEOs in the US. The chart above shows that the pay gap between CEOs and the typical worker has remained remarkably stable and flat for the last decade, and shows no upward trend that could be described as “skyrocketing.”
Consider also that the average US orthodontist earned $221,390 last year, slightly more than the average CEO ($220,700), but you’ll never hear media reports about “overpaid orthodontists” or “excessive orthodontist compensation,” or about the fact that orthodontist pay increased by 10.1% in 2015, nearly 5 times the 2.1% increase in the average CEO’s pay last year. You also will never hear about America’s “overpaid anesthesiologists,” “overpaid surgeons” or “overpaid obstetricians” who at average annual salaries of $258,100, $247,520 and $222,400 in 2015 all out-earned the average CEO last year by $37,400 (and by 17%) for anesthesiologists, by $26,820 (and by 12.2%) for surgeons, and by $1,700 (and by 1%) for obstetricians. Other medical professionals like internists ($196,520), family practitioners ($192,120), and psychiatrists ($193,680), dentists ($177,130) and nurse anesthetists ($160,250) earned salaries last year that weren’t too far below the average CEO.
Bottom Line: The concerns about skyrocketing CEO pay and “CEO-to-worker pay ratios” are distorted by looking at only a small outlier group of about 500 CEOs of America’s largest multi-national companies, out of more than 20,000 chief executives nationwide. That elite group of CEOs represents only 2.4% (and fewer than 1 in 40) of all of America’s CEOs, and ignores almost 98% of the nation’s chief executives.
Of course, many young, risk-taking CEOs are running early stage startups and tech companies, and many are making even less than the average CEO as reported by the BLS. Further, these entrepreneurs are usually not in it for their salaries in the early days, they’re in it for the payoff if their startups are successful and they one day join S&P 500 CEOs like Mark Zuckerberg. If we reduce the size of the Big Payoff (S&P 500 CEO salaries), the number of aspiring entrepreneurs trying to get there will likely be reduced.
We should applaud the highest-paid 500 CEOs as a group of the most successful American business professionals, and not vilify them. And we should keep in mind that they are an outlier, elite group, and not representative of the average CEO in America, who earns about the same as the average psychiatrist. Further, the fact that there are more than 20,000 risk-taking ambitious CEOs who are running companies, while making less on average today than an orthodontist, but who are trying to someday be among the top 500 highest-paid CEOs in the US is a sign of a dynamic, wealth-generating economy. Those job-creating entrepreneurs should be applauded as well.
Update: To arrive at the 373-to-1 CEO-to-worker pay ratio last year, the AFL-CIO compared the average S&P 500 CEO total compensation of $13.43 million in 2014 to the annual income of $36,134 for the “average production and nonsupervisory worker.” However, that figure of $36,134 was apparently arrived at using an average hourly wage of $20.60 and and an average workweek of about 35 hours per week (that’s just barely full-time, and would like include a mix of some part-time employees working part-time (fewer than 35 hours) and some full-time employees working more than 35 hours per week). Using the BLS estimate of average annual income of $47,320 in 2014 for all full-time workers in all occupations, we would get a CEO-to-worker pay ratio of only 283-to-1, almost 100 less than the reported 373-to-1 ratio by the AFL-CIO. Then consider that fringe benefits are now about 46% of cash wages for the average worker, and the average compensation for the average worker would be about $69,000, bringing the CEO-to-worker pay ratio down to about 195-to-1 when we consider total compensation for both CEOs of S&P 500 companies and average workers. Therefore, just making adjustments to include: a) all full-time workers in all occupations and b) fringe benefits, the AFL-CIO’s ratio falls from 373-to-1 to 195-to-1.
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