In a new multimedia advertising campaign, the California Endowment is calling on Sacramento residents to “do the math” in favor of raising the minimum wage. We took up this challenge, and our conclusions show that the endowment hasn’t done the math itself.
The endowment is referring to the oft-cited executive pay gap – the difference between CEO pay and that of the company’s lowest-paid employees. The endowment claims that there is a 500-to-1 gap – a sizable number designed to grab public attention and inspire action.
But don’t grab your pitchforks just yet.
The endowment’s website is surprisingly short on the details of its campaign, including the sources for its claims. But the organization’s ad says that “median CEO pay” is $5,048 per hour, and the state minimum wage in California is $9 per hour – hence the 500-to-1 pay gap. Unfortunately, the endowment’s ad appears to rely on a sleight-of-hand previously perfected by the AFL-CIO, where a small sample of CEOs from some of the world’s largest companies is used to define the compensation of all executives.
Let’s “do the math” for that group in California. According to the U.S. Bureau of Labor Statistics, there are 21,800 chief executives of companies and enterprises. Their average annual pay is $212,570, dramatically less than the $10 million-plus figure the endowment uses (not to mention the $773,336 paid to endowment CEO Robert K. Ross). An apples-to-apples comparison between the average pay of all California CEOs and all minimum wage employees reveals a pay gap that’s closer to 12-to-1.
Regardless of its size, it’s undoubtedly true that a pay gap exists. But why is it relevant in a campaign to raise the minimum wage?
While the endowment leaves that question unanswered, others who have used this rhetorical device (such as the AFL-CIO) are clear about its meaning: If CEOs weren’t paid so much, everyone else could be paid more.
But if you “do the math” for some of the largest service-sector corporations, you’ll find that cutting executive pay would have little impact on the hourly pay of employees.
Take Yum Brands, the corporate parent of well-known restaurants such as Pizza Hut, Taco Bell and KFC, and a popular target of union-backed protests. Its five-member executive team earned a combined $30 million in compensation in 2013, but Yum also employs 539,000 people. If the executive team could somehow take a 25 percent pay cut and distribute it evenly to its 463,000 part-time workers, hourly wages would rise by a penny.
Or consider Wal-Mart – perhaps the most-attacked company in the country. Its five-member executive team earned a combined $63 million in 2013. It is also the largest private employer in the country, with an estimated 600,000 part-time employees. Even if Wal-Mart’s executives took a 100 percent pay cut and distributed it equally among their part-time employees, hourly wages would rise by eight cents.
Cherry-picking a small group of the highest-paid executives to artificially inflate the CEO-to-employee pay gap may make for a good ad campaign, but it also makes for bad math and bad economics.
Mark J. Perry is a professor of economics at the University of Michigan, Flint, and resident scholar at the American Enterprise Institute. Michael Saltsman is research director at the Employment Policies Institute, which receives support from businesses, foundations and individuals.