05 February 2009

It's All Relative...

Now for something completely different.

Wasn't it Twain who said "There are lies, damned lies, and statistics?" A new book I just read about (The Numbers Game) tries to reveal how even numbers can mislead us, depending on how they are calculated, situated and promulgated.

I mention this because of the CEO pay flap for bankrupt banks and the CEOs who ruined them. We are seeing figures and numbers and not seeing what matters....

... How much more than the average employee should the CEO make. This is best expressed as a ratio not a number. Drilling down into the NYTimes archive I found this nugget:

"The average top executive's salary at a big company was more than 170 times the average worker's earnings in 2004, up from a multiple of 68 in 1940." (NYTimes April 9, 2006. I suspect it is even higher now.)

Now, 1940 was not a high water mark year, financially, but the point is how much more AS A RATIO should the top employee get compared to the AVERAGE worker which means not the lowest but the typical.

How much should a bank receiving federal rescue support, or auto company for that matter, pay their top executive should be figured as a ratio compared to other workers in the company. To be really fair, "average" can be artificially raised by paying some executives a lot, so a better measure would be the "median" wage, the actual one precisely in the middle if all the different pay figures were lined up in a row.)

In my workplace I am the CEO and highest paid employee. The median full time income (several employees are part-time and so each has been calculated as if they were full time) is $38k. I am paid $108k. The ratio is slightly less than 3/1.

The suggested figure of $500k is probably too low. A ratio of 10/1 would mean the median income would be $50k, which is not far from likely. The median income for NY City is $47k, which is nearly the same for Michigan, by the way, but about 9k higher than Grand Rapids where I live. But 10/1 is not practical, really. Remember even in 1940, before the war, the Depression lingering, the raio was 68/1.

Would 100/1 be too high? That's less than half the distance between 1940 and 2004. Probably not, as it is well below the halfway point between 68/1 and 170/1. And there are additional factors, such as the size of the company. Though I make only 3 times as much as the median wage, my pay is about 10% of the organization's annual expenses. Even a multi millionaire CEO gets only a fraction of a percent of the total company expenses.

But then comes the moral point, which is how much disparity is acceptable in a company or community? That's a long conversation and this post is already lengthy. So let's guesstimate for now.

How about we agree on an 75/1 ratio for CEOs under federal assistance. If the median wage is $50k, that yields $3.75m. But I am moralistic enough to agree that a large portion of that should be in bank stock, which cannot be sold until after one leaves the company and then not all at once.

Heck, I'll even say that the pay can go up, so long as the ratio remains the same. He/she gets rich only as fast as everyone else in the company.

Now that's an incentive I think.

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