The New York Times’ Steve Lohr today writes about the growing furor over executive pay, and the widening disparity between what top company officials make as compared to average workers.
But the story is accompanied by a chart, based on statistics from the Economic Policy Institute, that shows a huge dip in the disparity earlier in this decade. Today, according to the chart, the disparity is rising once again, though it has not yet reached the heights of 2000.
Nowhere in Lohr’s story is the blip explained. (Not that I’m blaming him — he probably had no idea that particular chart would be used to accompany his reporting.)
What’s the explanation? According to an Economic Policy Institute report from June 21, 2006:
The ratio surged in the 1990s and hit 300 at the end of the recovery in 2000. The fall in the stock market reduced CEO stock-related pay (e.g., options) causing CEO pay to moderate to 143 times that of an average worker in 2002. Since then, however, CEO pay has exploded and by 2005 the average CEO was paid $10,982,000 a year, or 262 times that of an average worker ($41,861).
OK, I suppose we could have figured that out. But someone at the Times should have seen that the chart did not perfectly match Lohr’s reporting that chief-executive compensation has risen from 35 times to 275 times that of the average worker since the 1970s. It’s true, but stuff happened in between, too.
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What caught my eye on the front page part of Lohr’s piece was the Wall Street lobbyists’ argument about high pay and “incentives to hard work and innovation” — it’s my understanding that it has been “innovative” investment ideas that have made this current mess so big and widespread — maybe sensible salaries would attract sensible executives who wouldn’t do such things. And “innovation” is a term that really sidesteps the question of whether these new ideas have been good ones.
Perhaps if their earnings weren’t so extravagantly tied to their company’s stock price by options as a part of their compensation packages, a major problem could be prevented. They would be forced, or encouraged, to risk their own money through payroll deduction or outright purchase of the company stock as a way to benefit from good performance by them and the company they lead. By forcing them to risk their own money, as we have to if we want to share in their company’s success, it would have the benefit of reining in risky business practices on their part in the zeal for profit.
The dip would look substantially less dramatic if the vertical axis were plotted logarithmically, not linearly as the NYT has done. You’d still see a significant dip that would’ve caused a one-alarm fire in your mind — not a three-alarm fire.Many financial sources these days often (even regularly) plot stock and financial market data on logarithmic vertical axes, because a doubling looks identically large whether it’s at the top or bottom of the graph.Example: the increase in (executive pay)/(average worker pay) between 1975 and 1990 would show up as a bit larger effect than the drop between 2000 and 2002. Both effects are roughly a factor of two.A different question to ask, but equally relevant to yours, would be: why did executive pay increase disproportionately relative to average worker pay between 1975 and 1990? Another question: why did it jump by a similar factor of two from 1990 to 1992?