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A Ratio That Insults Investors' Intelligence

By Alyce Lomax – Apr 17, 2013 at 11:31AM

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New year, same old story: CEO pay continues to disconnect from reality.

The average American worker made $19.77 per hour last year. Let's contemplate the hourly pay of some other Americans' wages. Oracle's (ORCL -0.19%) Larry Ellison made $46,000 per hour. General Electric's (GE 1.69%) Jeffrey Immelt made $12,000 per hour. Boeing's (BA -1.57%) W. James McNerney Jr. made $13,000 per hour. CBS(PARA -0.69%) Leslie Moonves made $33,000 per hour.

An hour is the amount of time Americans might allot for watching an episode of, say, Dirty Jobs in their free time. Speaking of jobs, dirty or otherwise, Discovery Communications' (DISC.A) CEO David Zaslav's pay calculation came to $24,000 per hour.

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Superstar salaries
The AFL-CIO released its annual PayWatch data on Monday, dumping a treasure trove of disturbing information about CEO pay into Americans' news feeds. Check out the site here, where you can see a wealth of stats about corporate America's wealthiest, and how their pay compares to that of many regular citizens.

Every year, the AFL-CIO reveals the ratio of CEO pay to that of the average worker. This ratio has dropped a bit from last year's tally of the pay of S&P 500 CEOs, but the outrage meter shouldn't drop. In 2012, the ratio was 354-to-1, not a far cry from last year's 380-to-1.

Let's add some historic context. In 2002, the ratio was 281-to-1. In 1982, it was just 42-to-1. Times sure have changed as "superstar CEOs" have allowed chief executive officers to join the ranks of athletes and movie stars in the realm of decadent compensation compared to the paychecks of most hardworking and less-celebrated Americans.

The upper echelon
Granted, the calculations for these staggering pay figures for chief executives are based on total compensation, which includes stock, options, and so forth. In other words, the CEOs didn't pocket all the money last year, and paper gains aren't the same as real ones.

Meanwhile, some of the CEOs listed, such as Larry Ellison, eschew base salary and bonuses, but still, their pockets have been well padded over years' time through their stock and options. As of March, Forbes calculated Ellison's net worth at $43 billion. In an interesting aside, according to Walter Isaacson's biography, Steve Jobs once chastised his friend Ellison for suggesting Oracle buy Apple to return Jobs to the helm (and help them both make more money), telling him, "Larry, this is why it's really important that I'm your friend. You don't need any more money."

Granted, the bull market of the last several years has helped many of these individuals realize elevated pecuniary gains from any stock they have sold. And regardless, there's no way to argue that these individuals' pay -- salaries, bonuses, and even perks (apparently these people sometimes can't even pay for their own cars, air travel, tax advice, etc.) -- doesn't leave regular Americans in the dust.

The average American worker made just $34,645 per year last year, and has no additional financial resources. CEOs make millions during their tenures, and their yearly take-home salaries bubble ever upward through bonuses, outrageous perks, and major stock-sale windfalls.

Regular Americans get fired if they fail at their jobs (and sometimes, for no reason at all but downsizing). Disgraced CEOs, on the other hand, are allowed to gracefully "resign" even when they could legally be fired, and often get insanely lucrative golden parachutes when they do.

It's time to pay attention, and vote accordingly
Many investors disregard any information provided by unions, but the lack of discourse between different groups these days is unproductive. Whether you agree with the AFL-CIO in general or not, its data raises a legitimate cost to contemplate. Some of these gigantic paychecks are difficult to justify, especially when you start drilling down on data that's easier to conceptualize, like hourly salary calculations.

Meanwhile, when it comes to shareholder returns, companies with such lucratively paid CEOs don't always provide great returns on investment, particularly when one digs beyond stocks' movements, which are often affected by external factors. How much growth in sales, profit, and other metrics gives a better picture of business health as opposed to short-term-sensitive measures.

The Dodd-Frank Act recommended a new disclosure mandate, which would compel companies to provide investors with the ratio of CEO pay to the average pay of their own employees. I'm hoping the day will come when that more specific data will be available to help inform our say-on-pay votes at the companies we own.

Until then, let's pay attention to this ratio that insults our intelligence -- and sometimes, our investment returns. This is shareholder money -- your money -- after all.

Check back at for more of Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, General Electric Company, and Oracle. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Boeing Stock Quote
$182.20 (-1.57%) $-2.90
General Electric Stock Quote
General Electric
$86.09 (1.69%) $1.43
Oracle Stock Quote
$79.28 (-0.19%) $0.15
Paramount Global Stock Quote
Paramount Global
$19.38 (-0.69%) $0.14
Discovery (A shares) Stock Quote
Discovery (A shares)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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