The title of the post is in the style of academic research studies. It’s not a generally accepted practice for such a long title to be followed by a subtitle. But if I were inclined to disregard such niceties, the subtitle would be “Robbing The Buggers Blind”.
(1)
Regular readers know what a numbers nerd I can be. ThinkProgress has brought together some numbers generated by The Institute for Policy Studies:
According to IPS, American CEOs make 263 times the average compensation for American workers, up from the 30 to 1 ratio in the 1970s. For comparison, the average compensation of a Japanese CEO is less than one-sixth that of their American counterpart and 16 times more than the average Japanese worker.
That disparity between the U.S. ratio of 263-to-1 and the Japanese ratio of 16-to-1 is obscene enough. Especially to American workers who “are taking home less in real weekly wages than they took home in the 1970s.”
But slice-and-dice the numbers and there’s another disquieting fact. For every dollar that American workers make, American CEOs take home $263. Japanese CEOs take home less than one-sixth of that. One-sixth of $263 is $43.83; let’s round that down to $43. The average Japanese worker makes one-sixteenth of that, which is $2.69.
In other words, the average Japanese worker makes more than two-and-a-half times what the average American worker makes.
And it’s not only American workers who are getting screwed by runaway CEO compensation:
In fact, a study released late last year by researchers Raghavendra Rau and Huseyin Gulen of Purdue University and Michael J. Cooper of the University of Utah that surveyed the performance of 1,500 companies between 1994 and 2006 found that “lavish CEO compensation may in fact undermine shareholder wealth.” The researchers concluded that “the 10 percent of companies with the most highly paid CEOs earned unusually low returns in both the near- and long-term.”
Fancy that! If your board members approve a compensation contract for you which amounts to letting you rob your company blind, your stockholders also end up getting screwed. (Of course, you, in turn, get to sit on their boards, and/or other boards, and help to keep on spreading what could and should have been stockholder wealth to top executives. And nobody ever has to waste a single dollar out of the tens of millions they receive each year buying a back-scratcher.)
(2)
The results of that research study probably deserve some annotation. The findings are not saying that when the market learns company X will pay its CEO an exorbitant salary, its stock price takes a hit. Those “unusually low returns in both the near- and long-term” represent what happens to the stock price after the market has digested the initial news. In other words, if you pick a company with a very highly paid CEO and look at its performance after the compensation contract is already in place, then, on average its stock under-performs each year for several years. Clearly, the one thing the exorbitant salaries are not doing is motivating CEOs to do a better job for stockholders.
The interesting thing is that there are essentially two competing explanations for supersized CEO compensation. The standard rationale advanced by supporters is that it creates stockholder wealth by motivating CEOs. The argument made by opponents is the expropriation-by-mutual-backscratching argument that can be labeled the “21st Century Robber Baron Hypothesis”.
One of these explanations doesn’t appear to be true.
*** Update, Friday, September 3, 3 p.m. ***
Two alert readers pointed out to me that the average American worker makes about $35,000 (as a ballpark number). My math implies that the average Japanese worker makes about $95,000. That, they said, seems awfully high.
(That didn’t exactly come as news to me. It had struck me too. The difference was, they were troubled by it. I should have been too, but wasn’t.)
Duly alerted, I went back to check the two studies I had cited, and it turns out the two readers are absolutely right. The average Japanese worker doesn’t make anywhere near $95,000.
First, let me correct one error in my post. I wrote:
ThinkProgress has brought together some numbers generated by The Institute for Policy Studies:
According to IPS, American CEOs make 263 times the average compensation for American workers, up from the 30 to 1 ratio in the 1970s. For comparison, the average compensation of a Japanese CEO is less than one-sixth that of their American counterpart and 16 times more than the average Japanese worker.
Actually, the second analysis is by Bloomberg Businessweek, not The Institute for Policy Studies (original article here).
And the math error is actually in the Bloomberg Businessweek analysis. They say:
Companies listed on Japan’s stock exchanges paid their chief executives an average of $580,000 in salary and other compensation last fiscal year, PWC estimates, about 16 times more than the typical Japanese worker. Average CEO pay at the 3,000 largest U.S. companies is $3.5 million, including stock options and bonuses, according to the Corporate Library, a research group.
That is what yielded “the average compensation of a Japanese CEO is less than one-sixth that of their American counterpart” result cited by ThinkProgress and used by me in my computsations.
However, their number for average CEO pay in the U.S. seems to be totally off the mark. According to the AFL-CIO’s Executive PayWatch page:
A chief executive officer of a Standard & Poor’s (S&P) 500 index company was paid, on average, $9.25 million in total compensation in 2009.
This means that the average American CEO makes roughly 16 times what the average Japanese CEO makes.
Reworking the math:
For every dollar that American workers make, American CEOs take home $263. Japanese CEOs take home one-sixteenth of that, which is $16.44. The average Japanese worker makes one-sixteenth of that, which is $1.03. No huge disparity, after all.
By way of verification, Bloomberg Businessweek implies that the average Japanese worker makes $36,250 (one-sixteenth of $580,000). According to the AFL-CIO, the average American worker makes $32,049. In other words, after correcting Bloomberg Businessweek‘s error in the Japanese CEO-worker compensation ratio, everything is in the right ballpark.