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CEO vs. Average-Worker Pay 2: A Dumb Metric

Jeff Bailey

My colleague Carla Fried has smartly laid out the available data and some potential investor value in the proposal to require companies to disclose the CEO’s pay as a multiple of median pay of the same company’s employees. A little additional noodling quickly reveals that the data will tell us a lot more about the workers’ pay than the value of the CEO.

Bloomberg last April kindly got a head start on the SEC’s proposed rules by rounding up industry pay figures as a proxy for actual company data and then computing multiples using disclosed CEO pay. What we learn is that, generally, the multiple is highest at companies with lots of low-paid workers, and thus low revenue-per-employee figures.

J.C. Penney (JCP), Abercrombie & Fitch (ANF) and Starbucks (SBUX) are all in the top give and, of course, they employ many thousands of low-wage workers, and, as calculated by YCharts, have very low revenue per employee. The workers’ average pay and benefits, Bloomberg calculated, were below $30,000 a year.

JCP Total Employees Chart

JCP Total Employees data by YCharts

Simon Property (SPG) and Oracle (ORCL) also made the top five, but only because they pay their CEOs ridiculous amounts -- $137.2 million and $96.2 million, respectively, in 2012. So, the list will also have near its top outliers on executive compensation. But mostly it will have companies with lots of relatively low-value employees (using revenue per employee to reach that conclusion).

JCP Annual Revenue Per Employee Chart

JCP Annual Revenue Per Employee data by YCharts

At the bottom of the list – companies at which the CEO makes a smaller multiple of median worker pay – you’ll find companies with fewer, highly-skilled and thus highly-paid workers. Biotechs and other engineer-intensive operations. The bottom five on the Bloomberg list were, starting with the last one, Agilent (NYSE:A), Xylem (XYL), Life Technologies , Covidien (COV) and Applied Materials (AMAT).

A Annual Revenue Per Employee Chart

A Annual Revenue Per Employee data by YCharts

And with the exception of Covidien, they’re not particularly large employers. The workers’ average pay and benefits were all above $50,000 a year.

A Total Employees Chart

A Total Employees data by YCharts

Revenue per employee, a metric you can chart and screen for on YCharts, helps reveal companies with low- or high-value workers. Putting a company like Starbucks together, of course, with such a competitive advantage over others in its space, is particularly impressive given that the work force is largely low-skilled, retail. And you can have very high average-worker pay, like at asset-intensive REITs and oil companies, and still do poorly by choosing the wrong assets or over-leveraging.

One can see the humanitarian desire to compare the boss’s pay to that of rank-and-file workers – 1795x at J.C. Penney last year after the board badly overpaid for Apple Guy Ron Johnson to come aboard and nearly ruin the company. However, beyond the outrage factor, it’s hard to see how useful the multiple is in debating executive compensation.

To this mind, scope and complexity of the business are worthwhile considerations. And the New York Times’ Gretchen Morgenson discusses those factors in her Sunday column, and also touches on how companies overpay CEOs, on a relative basis, by choosing larger and more complex companies to compare themselves to.

Call me crazy, but once the CEO has amassed a certain amount of equity, and he’s thus truly aligned with shareholders, I doubt the value of paying the manager much at all. If he can’t get out of bed to go protect, and perhaps enhance, his $100 million equity investment in his employer, I don’t know what would motivate the man, or woman. Thus, while we generally leave coverage of executive compensation to others, we have at times singled out the CEOs who’re already equity-laden, but are still rewarding themselves with huge equity grants. Namely Larry Ellison at Oracle. Feeding at the trough, we call it. We’ve also been critical of CEOs who scale down their companies through spinoffs, yet grab higher compensation to run a smaller, simpler company. Hello Irene Rosenfeld at Mondelez (MDLZ). And one-off bonuses to CEOs who clearly aren’t going anywhere, like Starbucks’ Howard Schultz, are idiotic.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

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