The Association of U S West Retirees



A Call for Focus on 'Average'
Readers Challenge the Mathematics used to Compare CEO, Worker Pay
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 worker.

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 point.

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 last year.

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 never materializes.

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