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Monday, September 19, 2011

Johnston: Shrinking Corporate Officer Pay

Reuters, Shrinking Corporate Officer Pay, by David Cay Johnston:

It’s time to prick the popular image of ballooning executive pay with some sharp new facts.

As a group, corporate officers — executives with broad authority to act on the company’s behalf, not just follow orders from the CEO or some other boss — are making less, not more, my analysis of newly available tax data shows. ... [A]mong the nearly one million corporate officers in the United States, this new data, never available before, show that the overall story is one of shrinking pay. ...

Corporate officers earned less total pay in 2008 than they did a decade earlier in 1998, even though there were more company officers at firms with more than $500,000 of revenue, the threshold for reporting by name to the IRS. In all but two years since 1998, total pay was higher than in 2008.


Average pay looks to be significantly smaller than way back in 1994.

Measured in 2008 dollars, the 990,077 corporate officers whose compensation was reported on tax returns made $466.8 billion in 2008, down slightly from $471.4 billion in 1998.

In 2008 their average compensation was $471,500, down about 13.5% from an estimated $545,100 in 1994.

These figures, which I distilled from traditional IRS statistical reports plus a valuable new IRS data set, run counter to the image of the bloated corporate pay packages that have been a staple of spring news reports for two decades. ... The new data come from a document entitled 2008 Estimated Data Line Counts / Corporate Tax Returns.

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Comments

The trouble with "average pay" is that it is an average.

I know this is stock and trade of economists and journalists, but the selection of the group to average can provide misleading results.

Starting with firms with $500,000 in revenue does not provide really good information. A family restaurant or large hair salon can gross that much.

(Like the college president who told his faculty they were well paid among the peer group institutions, after carefully selecting the peer grou0 himself)

A smaller sample of larger companies might provide better information.

Posted by: save_the_rustbelt | Sep 19, 2011 8:15:00 AM

The author uses the term "total pay." I have attempted to skim his article and, as usual, found it to be rather opaque as to definitions and the source of his data.

One thought comes to mind - 1998 was the very tippy top (technical term) of the dot.com hitech boom. And 2008 was a recession year. So losses inhibited bonuses. And many stock options were under water.

The authors choice of years (whether conscious or not) may have undermined the validity of the comparison. Upon reflection, it seems unlikely that the author was unaware of what was happening in 1998 and 2008. In which case, the period was chosen to support a previously held belief.

Posted by: Ed D | Sep 19, 2011 8:43:22 AM

Since this is an average, could anything be attributable to an increase in popularity of the one-dollar salary?

Posted by: Joshua | Sep 19, 2011 12:56:44 PM

The trend seems driven by corporate profits and even down years management suceeds in maintaining a high share of profits, contrary to what one would expect in a pay for performance model.

Posted by: Tom | Sep 19, 2011 1:41:35 PM

Two issues: first, the graph of total compensation is completely misrepresenting the data. If the axis were plotted from zero to $500 billion, it would show how little things have changed (in the midst of the Great Recession, no less). Second - compensation for corporate officers is almost half of corporate profits? That doesn't strike anyone as excessive?

Posted by: Josh | Sep 19, 2011 2:00:09 PM

Tom - the results look more logical if a significant portion of executive pay is relatively fixed - when profits are down, the proportion of pay to profits rises because the denominator went down, even when the numerator went down, too. So while total compensation follows the business cycle because some (many?) officers receive performance-based compensation, many don't, and so the share of corporate profits is roughly counter-cyclical.

Posted by: Anthony | Sep 19, 2011 3:11:19 PM