The CEO "Pay Gap" Is Actually Narrowing

The real problem is that ordinary workers have trouble boosting their own pay.


Every year, the AFL-CIO publishes a splashy analysis showing the vast gap between CEO pay and the earnings of ordinary workers. The mainstream press usually reports it with predictable outrage and little skepticism.

But the AFL-CIO's own numbers show the pay gap has been narrowing, while other data demonstrate that new "say on pay" rules are giving shareholder activists more power to rein in bloated executive pay packages.

[READ: Pay Cuts Hit CEOs]

"CEO pay is becoming more aligned with performance, in the interest of shareholders," says Aaron Boyd, director of research at Equilar, an executive compensation data firm. "We're also seeing a number of perks going away, especially the use of aircraft for personal use."

According to data the AFL-CIO provided to U.S. News, the real explosion in the pay gap occurred during the 1990s, which was generally a prosperous decade for many Americans. In 1990, CEOs earned 107 times the pay of the average worker. By 2000, that ratio had soared to 525, the highest ever in the history of the AFL-CIO study. Though the study focuses on the pay of big-company CEOs, the dot-com boom and the surging stock market in the late 1990s probably had something to do with the exploding pay of CEOs.

The pay gap narrowed during the 2000s, with the ratio falling to a low of 263 in 2009, the deepest year of the Great Recession. Since CEO pay often entails company stock, the plunging stock market explains much of the decline.

[SURVEY: Surprise Drop in Pay Hits 15 Industries]

CEO pay has recovered handsomely since then, with CEOs earning an average of $12.3 million in 2012. The average worker earned $34,645, raising the ratio to 354. If you measure pay changes since 2000, average workers have actually done better than CEOs, according to the AFL-CIO numbers. After accounting for inflation, average-worker pay has risen by 4 percent since 2000, while CEO pay has fallen by 30 percent. Compared with levels right before the recession started, average-worker pay, adjusting for inflation, has gone up by 2.2 percent while CEO pay has risen by 5 percent.

Again, most of the growth in CEO pay occurred during the 1990s, when CEO pay, adjusted for inflation, rose 409 percent. Average-worker pay rose just 4.3 percent.

The AFL-CIO numbers, while clearly meant to favor rank-and-file workers such as union members, actually overstate average pay when compared with other studies. Data from the Census Bureau, for instance, shows that median household pay, after inflation, fell by about 8 percent between 2000 and 2011, the last year for which data is available. That's probably because the AFL-CIO pay figures are for "production workers" who are actually employed, while Census data measures total income for all households, including those with people who can't find work.

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Regardless of how large the gap is between the earnings of CEOs and everybody else, it's undeniable that a privileged class of well-educated and affluent professionals has benefitted from a global information economy that has left many others behind. The biggest issue, however, isn't really how much CEOs earn, because it's not as if they're taking money that would otherwise go to assembly-line workers. The challenge is for more ordinary workers to gain the skills that will raise their value to employers and allow them to earn more by contributing more to the economy.

On an annualized basis, the pay of production workers in the AFL-CIO study rose by just 0.3 percent per year, after inflation, during the last 12 years. You might be able to keep up—barely—at such pay levels, but you sure can't get ahead. When ordinary workers start to earn more, it will matter a lot less what their bosses earn.
