When you're digging for facts these days it's a good idea to check who paid for the figures you're looking at before taking them seriously.
A case in point would be a new batch of research on CEO pay published by the Business Roundtable and trumpeted on page A2 of The Wall Street Journal (subscription required) on Wednesday.
What's the Business Roundtable? It's a Washington lobbying group representing 160 chief executive officers from our most elite corporations. One of the nation's truly powerful voices on economic issues, the Roundtable loudly supported President Bush's tax cuts for the wealthy, which have significantly widened our economic divide and plunged us into withering debt, as well as the president's failed plans to privatize Social Security. In other words, it's generally considered the political voice of American big business.
So this week the Business Roundtable published a new research paper designed to debunk the mythology about how richly American CEOs are compensated. And guess what? Surprise, surprise, it turns out this country's CEOs aren't the overpaid blowhards the press portrays them to be. In fact, the Roundtable study implies that corporate leaders in the U.S. actually are underpaid by some measures.
Talk about balls. I don't know what's worse, the flimsy report itself or the fact that the thing received prime journalistic real estate in the nation's top financial publication.
The Roundtable's five-page study, written by executive compensation consultants at Frederic W. Cook & Co. and based on figures provided by Mercer Human Resources Consulting, is barely longer than the press release announcing its findings. Three of the pages are single charts, and one entire page is spent on complaints about what the group perceives as the media's unfair treatment of CEO pay issues. For example, CEOs hate it when reporters cherry-pick inflammatory compensation figures, quote statistics out of context, and use the pay of executives at the largest corporations to make sweeping generalizations about all CEOs.
Now here's what would've been helpful: a single example of a cherry-picked figure, out-of-context statistic, or sweeping generalization. I guess nobody at the Business Roundtable considered that if you're going to wag your finger it's a bit more persuasive if you actually back up your accusations.
But the Roundtable isn't really focused on needling the press. It's far more interested in justifying outrageous pay raises for CEOs. So the study fairly quickly turns to its "money number," which is found on the second page under the heading "Defensible CEO Pay Data and Trends." (I'll leave it to you to determine what it means when the strongest adjective you have to support your point is defensible.)
It turns out from 1995 to 2005 the growth in CEO pay at 350 large U.S. companies was in line with the growth in total shareholder return at those companies over the same period. Specifically, the study found that the compound annual growth rate of median CEO pay over that time was 9.6 percent, while total shareholder return grew at an annual compound rate of 9.9 percent, net income at 8.5 percent, and market value at 8.8 percent.
Hell, in those terms our zillionaire CEO class sounds like a great deal! Who cares what they're making as long total shareholder return is growing faster, right?
Too bad it's a crock.
First, the Business Roundtable really should be careful when using a company's performance, either in terms of stock price or earnings, to justify CEO pay. Because if that's the case, executives logically should expect to see their pay cut when their stock price falls or their earnings growth stops. See, it's funny how CEOs don't mind benchmarking their pay to their company's stock price in a rising market. But when was the last time you read about an American CEO having his total compensation slashed to fairly reflect shareholder losses in his company's tanking stock? The stock market isn't a one-way street, but corporate executives don't want to really roll the dice when it comes to their personal take home.
In terms of the report's specifics, it's far too short to explain the methodology used in calculating the compensation figures, total shareholder return index, or compound annual growth rate statistics. So it's impossible to know how the Roundtable's consultants parsed the numbers. But there's an obvious problem with the study's time-frame. By starting in 1995 the CEOs are using pre-Internet bubble stock prices to boost their return comparisons. What does that mean? Well, on Jan. 3, 1995, the first day of trading for that year, the Dow Jones Industrial Average opened at 3,834 and the Nasdaq Composite at 751. Five years later, on Jan. 3, 2000, the Dow opened at 11,501 and the Nasdaq at 4,186. On Wednesday the Dow closed at 11,225 and the Nasdaq at 2,175.
How does that saying about rising tides and boats go again?
Obviously the Roundtable knew that by starting the study back when the Dow was in four digits and the Nasdaq in three the total shareholder return figures would look pretty sweet. But try starting the study after Jan. 1, 2000. Those same return figures wouldn't be nearly as good. Indeed, if CEOs had their annual pay packages pegged to their stock prices for the past six years, far more would've taken whopping pay cuts than received massive raises.
Of course all this is just nitpicking. The big-picture problem with CEO pay has nothing to do with earnings and stock prices. The real trouble is that imperial CEOs have become utterly divorced from rank-and-file workers and have come to feel entitled to completely separate standards of pay. The phenomenon was shown fairly definitively in this executive compensation study published last November by economists Carola Frydman of Harvard University and Raven Saks of the Federal Reserve Board. Part of the study compared how CEOs have been paid over the years to how average workers have fared. Here are the numbers; notice the story they tell:
From 1936 to 1939 CEOs earned 82 times what the average worker made.
From 1940 to 1945 CEOs earned 66 times what the average worker made.
From 1945 to 1949 CEOs earned 49 times what the average worker made.
From 1950 to 1959 CEOs earned 47 times what the average worker made.
From 1960 to 1969 CEOs earned 39 times what the average worker made.
From 1970 to 1979 CEOS earned 40 times what the average worker made.
From 1980 to 1989 CEOs earned 69 times what the average worker made.
From 1990 to 1999 CEOs earned 187 times what the average worker made.
From 2000 to 2003 CEOs earned 367 times what the average worker made.
It's enough to make you long for the good ole days. I wonder if the folks at the Business Roundtable feel the same way.