CEO Pay in Perspective: A typical employee of the S&P500 firms implicitly “contributes” to the salary of his CEO on average one half of one percent on an individual salary basis

CEO Pay in Perspective. Marcel Boyer. Centre interuniversitaire de recherche en analyse des organisations, Dec 2019. https://cirano.qc.ca/files/publications/2019s-33.pdf

Abstract: The CEO pay ratio, measured as the ratio of CEO pay over the median salary of a firm’s employees, is the most often quoted number in the popular press. This ratio has reached 281 this last year for S&P500 firms, the largest US firms by capitalization (as of November 21 2019). But the B-ratio I proposed here, measured as the CEO pay over the total payroll of the firm, relates CEO pay to the salary of each employee and may be the most relevant and informative figure on CEO pay as perceived by the firm’s employees themselves. How much a typical employee of the S&P500 firms implicitly “contributes” to the salary of his/her CEO? An amount of $273 on average or 0.5% of one’s salary, that is, one half of one percent on an individual salary basis. To assess whether such a contribution is worthwhile, one must determine the value of the CEO for the organization and its workers and stakeholders. The Appendix provides the data for all 500 firms regrouped in 10 industries (Bloomberg classification).


IV. Conclusion

The CEO pay ratio, defined as the CEO pay (not the total compensation of a CEO since it
typically excludes different forms of incentive bonuses) over the median salary of the firm’s
employees, is one of the most discussed topics in society today. I showed that the CEO pay ratio
for the S&P500 firms (the largest US-traded firms by capitalization) reached an average value of
281 this last year (as of November 21 2019), a median value of 170 and a weighted average value
of 185, the last two ratios being more representative of the overall distribution of the relative
CEO pay. Other ratios, clearly more informative and revealing for stakeholders (employees,
citizens, shareholders, suppliers and clients) are the CEO pay per employee (average of $1961,
median of $564, weighted average of $273) and the B-ratio, defined as the CEO pay over the
total payroll of the firm, hence the implicit contribution of each employee (as a % of his/her
salary) to the CEO pay (average of 2,30%, median of 0,88%, weighted average of 0,50%).
I discussed above the value of management (CEO) from a real options approach, which is
arguably the proper methodology to use. Whether a given CEO is worth the pay she/he is getting
remains an open question. But the difference between a good one and a bad one for employees
and other stakeholders is potentially huge.
The CEO pay debate raise two additional crucially important and related questions. First, the
question of inequalities in society, their determining factors, and their evolution over time. I
discuss that question in my forthcoming paper “Inequalities: Income, Wealth, Consumption”,
where I show the level of inequality in income and wealth have been decreasing between 1920
and 1980 but increasing between 1980 and today, while inequality in consumption, arguably the
most important form of inequality, has been decreasing over the whole period and in particular
over the last two decades. I attempt in that paper to identify and explain the determinants of those
movements. Second, the question of the social role of inequalities in income and wealth. I discuss
that question in my forthcoming paper “The Social Role of Inequalities: Why Significant
Inequality Levels in Income and Wealth Are Important for Our Prosperity and Collective Well
Being”, where I show that inequalities in income and wealth develop from two related social
needs namely the need to ensure a proper level of savings and investments and the need to induce
the proper but individually costly acquisition of new competencies, both to favor increased levels
of productivity and prosperity.