Saturday, September 02, 2006

CEOs Now Earn An Astronomical 411 Times More Compensation Than Workers

According a story published by the group United for a Fair Economy (UFE) and posted on their website, the overall CEO-worker pay gap in the United States has grown from 107-to-1 in 1990 to 411-to-1 in 2005. Minimum wage workers have lost 9 percent after inflation in the same 15 years. If the minimum wage had risen at the same pace as CEO pay, it would now stand at $22.61 per hour, over four times the current $5.15. It is also useful to note that while the minimum wage has remained stagnant since 1997, Congressional salaries have steadily increased, too (graphic upper left courtesy of National Vanguard).

The story refers to a report entitled Executive Excess 2006, co-authored by United for a Fair Economy, a national organization based in Boston that spotlights growing economic inequality, and the Institute for Policy Studies, an independent center for progressive research and education based in Washington D.C. The story specifically focuses on two separate categories of CEOs: Oil Executives, and Defense Contractors. My commentary is intermingled with excerpts from this story.


With Americans now paying over $3 per gallon, petroleum profiteers are raking in nearly three times the pay of CEOs in comparably sized businesses. In 2005, the top 15 U.S. oil CEOs got a 50% raise since 2004. They now average $32.7 million, compared with $11.6 million for all CEOs of large U.S. firms. Executive pay at U.S.-based oil companies also far outpaced pay at oil companies based outside the United States. BP and Royal Dutch Shell paid their CEOs only one-eighth what their U.S. counterparts collected — just $5.6 and $4.1 million in 2005, respectively — even though both companies operate in the same global marketplace as their U.S.-based competitors.

CEO William Greehey of Valero Energy took home the oil industry’s biggest executive pay rewards in 2005, pocketing $95.2 million. The average construction worker at an energy company would have to work 4,279 years to equal what Greehey collected last year.


Since the “War on Terror” began, CEOs at the top 34 military contractors have enjoyed average paychecks that are double the compensation they received in the four years leading up to 9/11.

The new Executive Excess report surveys all publicly held U.S. corporations among the top 100 defense contractors that had at least 10 percent of revenues in defense. These 34 CEOs combined have pocketed almost a billion dollars since 9/11 — enough to employ more than a million Iraqis for a year to rebuild their country. In 2005, defense industry CEOs walked off with 44 times more pay than military generals with 20 years experience, and 308 times more than Army privates.

United Technologies CEO George David led the pack with over $200 million in pay since 9/11, despite investigations into the quality of the company’s Black Hawk helicopters.

CEO Jay Gellert of Health Net saw the biggest personal pay raise after 9/11, a 1,134% leap over the preceding four years. The company owes its earnings growth to American taxpayers, who may not realize they pick up a hefty share of cost overruns in the privatized military health care system. “Americans across the political spectrum should be outraged by the sight of executives cashing in on war windfalls,” says Executive Excess 2006 co-author Sarah Anderson. “Unfortunately, partisan politics has stopped Congress from effectively overseeing this war contracting free-for-all.”

While the producers of Executive Excess 2006 freely confess their progressive agenda, they are one of the few groups of progressives (a sanitized term for "liberal") intellectually honest enough to define and defend their terms and standards. Here's their description of how they calculate CEO pay from page 49 of the report:

How We Calculate CEO Pay

For 13 years, our Executive Excess reports have followed the traditional methodology used by the Wall Street Journal, Forbes, and Business Week for calculating total direct compensation. This is based on salary, bonuses, restricted stock awards, payours on other long-term incentives, and the value of stock options exercised in a given year.

Some other business publications and researchers include the estimated value of stock options grants. We prefer the definition that includes options exercised and not options granted because it fits the common-sense definition of pay understood by most laypeople of "how much money you got this year". Estimated values of option grants are just that, estimates. What the CEO actually puts in his pocket is often drastically different.

This not only makes sense but provides better horizontal consistency in the comparison between CEO and worker compensation. Many sources will also include options granted to make the difference look worse than it actually is. Many media sources reported that former Exxon Chairman Lee Raymond received a golden parachute worth over $400 million because they included unexercised options as part of the package. In contrast, the Washington Post more correctly reported a $167.7 million package because they did not include unexercised options. Stock options are nothing more than a piece of paper until they are cashed in. When you consistently exaggerate your cause, as Jewish supremacists have done with the Holocaust, homosexual supremacists have also done with the "Ten Percent Myth", and anti-smoking fanatics likewise with the so-called "dangers" of second-hand smoke, you lose credibility and marginalize yourself.

How We Calculate CEO-Worker Pay Ratios

Calculating CEO-worker pay ratios has become a bit of a cottage industry, with widely-varying figures. This year, we calculated the gap at 411-to-1. Our figure for average CEO pay is based on a Wall Street Journal/Mercer survey of 350 companies with revenue of $1 billion or more. Our figure for worker pay is based on Labor Department statistics for all private sector workers, including those who work less than 35 hours per week. This results in a lower figure for average worker pay ($28,315 in 2005) than in other ratios based [only]on compensation for full-time workers. We prefer to include part-time workers because they make up 23% of the U.S. workforce and we want to capture the reality of working life in America. Another reason some other ratios are smaller than ours is because they base worker pay on the total cost of compensation to employers, which includes healthcare, contributions to pensions, and other benefits that are not included on the CEO side. Since we have strongly criticized the absence of accurate public information on excecutive perks and benefits, we think it is important to use worker pay that does not include these costs either.

Again, this is a manifestation of intellectual honesty. To use common definitions ensures a more accurate and representative comparison. Including part-time workers in the comparison is a novel idea, and may prove justified simply because of the magnitude of their numbers. We all know that the "official" unemployment rate is skewed downward and made to appear more favorable by counting only those actively seeking work. Many of the homeless people who infest our street corners in Anchorage, Alaska are certainly "unemployed", but if they've long since given up actively seeking work, they will not be counted.

There are those few intrepid souls who actually defend astronomical CEO compensation. In an April 2006 article by Elan Journo entitled "Why Are CEOs Paid So Much", published on the Ayn Rand website, Journo has this to contribute:

The answer is that successful CEOs are indispensable to their companies. They earn their rewards. How big an influence can one man have on the fortunes of the entire corporation? Consider the impact of Jack Welch on General Electric. Before his tenure as CEO, the company was a bloated giant, floundering under its own weight. Splintered into dozens of distinct and inefficient business units, GE was scarcely making a profit. Welch turned it around. He streamlined and reorganized the company's operations and implemented a sound business strategy yielding more than $400 billion worth of shareholder wealth.

In business, success requires long-range thinking. But CEOs must project a strategic game plan in terms not merely of a month or two, but of years and decades. A biotechnology company, for example, may spend 15 years and billions of dollars developing a new cancer-fighting medicine. Success is impossible without the business acumen of its CEO. For years before a marketable product exists, he must raise sufficient capital to sustain the research.


In order to be successful in the long range, the CEO's strategy must encompass countless factors. He must devise a plan to grow the business in the face of competitors, not only from within the United States, but from any and every region of today's global economy. The CEO calls the plays for a team of tens (and sometimes hundreds) of thousands of workers. All of the actions of every employee and every aspect of the business must be coordinated and integrated to produce the cars, computers or CAT scanners that yield profits to the company. It is the CEO who is responsible for that integration.

Journo further compares the CEO to the superstar athlete. However, such a comparison is questionable. Who helped Barry Bonds hit 73 home runs in 2001? The answer - no one. He personally hit each and every one. However, the CEO is NOT the sole architect of his own success. Long-range projections are based upon input provided by OTHERS. Success of the CEO's decisions are based upon the performance of OTHERS. As a matter of fact, Journo admits that in the second paragraph and undermines the original premise. Another flaw in the "athlete" comparison is that athletes are performers, not executives. Athletes generally make decisions for themselves. So the premise of a CEO's exponentially-greater value is not a proven fact, but an assumption, which is subject to challenge at any time.

Of course, any calls for wage controls would be purely socialistic and incompatible with our system of economics. But the mere glare of constant publicity and the attendant economic fallout might be enough to prick the consciences of some of these corporations and promote a certain degree of reform. An oil company giving a $167.7 million golden parachute to a retiring CEO can be assumed to be capable of paying a higher petroleum profits tax than otherwise expected. There's no question that a CEO is clearly worth more than the average worker - but not 400 times more. How much more? I don't know. But 400 times more seems too much, particularly when executives have received performance bonuses in the past for laying off hundreds of workers in one fell swoop. Capitalism is fine - it just needs a human face.

Executive Excess 2006 also challenges the current reform agenda for addressing excessive CEO pay in oil and defense as well as throughout the American economy. That agenda, reflected in new SEC rules released at the end of July, emphasizes requiring corporate boards to fully disclose all the revenue streams — perks and pensions included — that go into contemporary executive pay. But disclosure alone, notes another report co-author Chuck Collins, won’t restore fairness to the nation’s executive suites. “Transparency has been ineffective in curtailing CEO pay,” says Collins. “The root problem is an imbalance of power. We need to give more clout to other stakeholders, such as requiring shareholder approval of executive pay and retirement packages, as is now done in Britain.”

Authored by Sarah Anderson, John Cavanagh, Chuck Collins, and Eric Benjamin, and edited by Sam Pizzigati, Executive Excess 2006 is the 13th annual CEO pay study by the Institute for Policy Studies and United for a Fair Economy.

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