A Call for Focus on 'Average'
Readers Challenge the Mathematics used to Compare CEO,
By Allan Murray
The Wall Street Journal
Saturday, July 8, 2006
It may not excite everyone, but the distinction between
"median" and "average" -- particularly with regard to CEO
pay -- was a subject that got a lot of readers of the
Business column going this week.
Wednesday's column previewed a study sponsored by the
Business Roundtable, which argued that CEO pay is not quite
as outrageous as some press reports have suggested. The
study, done by compensation consultant Frederick Cook, said
that numbers suggesting CEOs earned as much as 475 the pay
of the average worker were exaggerated in part because they
looked at "average" pay rather than "median" pay. Using
figures from a Mercer Consulting data base of 350 large
companies, Mr. Cook concluded that median CEO pay was about
$6.8 million last year, and 179 times the pay of the median
Mr. Cook's contention is that the median number is the right
one to use, because it's less influenced by the large pay
figures earned by some of the outliers. But a number of
readers disagreed, saying the outliers are precisely the
Here's Edward Singletary:
"The Business Roundtable
is clearly not interested in giving greater transparency to
the issue of CEO pay. By using the median compensation,
they seek to draw attention away from all those dollars
going out the door between the median and the average. I
don't know how much that is but it is the only way to
address fairly the question of 'How much is too much?'"
And here's Mike Fleming:
"Cook reported 9.9%
growth in 'median' annual shareholder returns for a 10-year
period to justify a 9.6% annual 'median' CEO pay growth.
Did shareholders receive median growth in returns? Of
course not. We did not receive median returns either.
Instead, investors get the average return, as is frequently
quoted in the press. And did Cook include companies like
Enron, Global Crossing and others that went bankrupt, and
new businesses that struggle, or do they use only companies
that were in business for the full decade? The fraud of
survivorship bias in long-range statistics of this sort is
all too common."
Lawrence Beck asked for a different calculation:
"We need to know if
corporate profits are fully funding these CEO and
shareholder windfalls, or if, to some degree, they are being
funded through the erosion of employees' real wages."
Whether erosion of wages "funded" CEO pay is a matter of
interpretation. But even Mr. Cook's figures show workers'
pay rose at only half the pace of CEO pay. As a result, the
CEO-to-worker pay ratio went from about 90 in 1994 to 179
In any event, Mr. Cook's study doesn't seem to have done
much to stop the outrage of shareholders who see CEOs
walking away with huge pay packages at a time when the
company's stock falling.
Here's Nick Verbitsky:
"When a CEO makes $85
million or $250 million in a year in which shareholders are
taking a bath, it isn't just wrong, it's outrageous, and the
outcry about it is completely justified. Though Jack Welch
took his lumps over the years with Kidder Peabody and other
issues, I don't recall a vocal shareholder outcry about his
pay package (that regarding his retirement perqs
notwithstanding). After all, his shareholders were rolling
in dough; they didn't have much to complain about."
Mr. Cook points out that many of the super-high pay numbers
happen when an executive cashes out options earned over many
years. Instead of that measure, he calculates stock options
at the time they are issued, using the Black Scholes
method. But some business people complain about that
measure as well, since if the stock doesn't rise, the pay
Mr. Verbitsky also said he wasn't troubled by the fact that
CEOs of private companies earn even fatter pay checks:
"Yes, it's true that
CEOs of some companies owned by private-equity funds earn
lavish pay packages, but for the most part, that pay is
purely based on performance; whereas a straight-faced
argument could not be made for the aforementioned CEOs and
others of their ilk. What's more, the exit strategy of most
PE funds is to take their portfolio companies public at some
point in the future, and if CEOs don't perform, these
investors will find someone who will, so they can cash out."
Finally, Fred Arnold makes the following suggestion:
"The U. S. is the only
developed country in the world with CEO pay levels that are
highly inflated compared to the pay of their workers. Since
we are not the only country in the world with successful
businesses, perhaps it is time to outsource the CEO job to a
foreign country and save some real bucks, instead of just
chopping more jobs here."
Write to Alan Murray at