“Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.” –Aaron Levenstein

While I’m talking about people who use the truth to mislead…

I visited Mom for a bit yesterday evening, and while there, I played with a little black and white radio/TV/Flashlight thing that she had on her kitchen counter. It was hooked up to cable, and while I was fiddling, I found myself watching CSPAN.

I couldn’t get the sound to come in right, and, as I said, I was pretty much just goofing off, but I saw someone talking about a chart that caught my eye. The chart showed average worker salaries for the last several years (I think it was a couple of decades of information, but again, I couldn’t make out details on the fuzzy five or so inch screen), and how, adjusted for 2005 dollars, the workers had made pretty much the same amount of money over the timespan. Another line on the chart appeared to show what their payrates “should have been“, if they had received payraises to keep their pay proportional to that of the company’s CEO.

A quick Google search reveals that CEO/Worker pay ratios are often used to criticize CEOs who earn a “gluttonous” amount.

Let’s be reasonable for a moment. First of all, while it’s certainly emotionally compelling to talk about the workers who have effectively been working for the same amount for the last twenty years or so, that’s really misleading. The individual who was working in the job twenty years ago almost certainly has moved on, probably to another job where he is receiving considerably more money, even adjusted for inflation. The job is worth a certain “value” to the company, the company pays for the job in relation to that vlaue, and the fact that the value is more or less consistent over time shouldn’t surprise anyone (as I’ve argued before, the dollar amount really doesn’t matter, since the market will keep it “balanced”).

Secondly, CEO to average worker isn’t really fair without other context. Let’s pretend for just a second.

Imagine that I’ve started my own business. I have ten non-management, blue-collar employees (“workers”, for lack of a better term), and for the sake of argument, they all make $20,000. I, on the other hand, make $60,000, for a ratio of 3-to-1. Fast forward twenty years. My company’s a big success, and I now have a thousand workers, a number of managers to help keep things running smooth, support staff, etc. The workers’ pay averages (the inflation-adjusted equivalent of) $20,000. I, on the other hand, now make $600,000. That’s a ratio of 30-to-1.

In the course of ten years, the CEO-to-workers ratio has gotten “worse” by an order of magnitude. It’s ridiculous, absurd, gluttonous. I should be giving up some of my extra pay to make the workers’ lives better. What kind of a jerk am I, anyway?

Well… for the sake of argument, let’s say that those thousand workers are, for all intents and purposes, doing the same job the workers ten years ago were doing. It has the same relative value, and so it pays the same. On the other hand, I’m now managing (through intermediaries, granted) at least 100 times as many employees, dealing with legal issues and such that I would never have even considered ten years ago.

Simply comparing the CEO to the average worker’s pay is an ultimately meaningless measure without a great deal of extra context.

The Board of Directors that runs a publically-traded company sets a CEO’s salary and compensation package based on the value they see the CEO bringing to the company, just like the accountants set the salary for a fry cook based on the value that he brings. The fact of the matter is, people get paid by a company based on the value of their work to the company. Whether it’s fair or not, the value of a CEO can vary greatly from individual to individual or even with the same indivdiual from year to year, but the value of a fry cook at a single McDonald’s restaurant is pretty consistent with respect to the market.