(AP Photo/Pablo Martinez Monsivais)

“When I graduated from the Naval Academy corporate CEOs [chief executive officers] made 20 times what the average worker made. Today it is more than 300 times. This isn’t the result of globalization. The average Japanese CEO makes 10 times the salary of the average worker. The average German CEO makes 11 times.”

–Former senator Jim Webb (D-V.A.), speech at International Association of Fire Fighters legislative conference, March 10, 2015

Webb is one of the few Democrats testing the waters for a presidential run in 2016, likely against Hillary Rodham Clinton. His speech at the International Association of Fire Fighters legislative conference focused on economic inequality and sentencing laws.

One of the points he made about economic inequality was the statement above, focusing on the wage gap between chief executives and average workers. While disproportionately high chief executive salary pay compared to average salaries is not a new argument, the comparison to other countries caught our attention.

Are Webb’s figures correct on the wage gap between chief executives and average workers in the U.S., Japan and Germany?

The Facts

Webb graduated from the Naval Academy in 1968. Research from the left-leaning think tank Economic Policy Institute shows that the chief executive-to-worker compensation ratio in 1965 was 20-to-1.

There are many ways to calculate what an average chief executive “makes,” and the ratio changes depending on the measures of “compensation.” The Fact Checker asked the Webb 2016 Exploratory Committee’s spokesman to find out the source for his figures. Webb was out of the country and was unavailable for an interview, but the spokesman said the former senator used “The Economist and other sources.” The statistics have been long quoted by Webb, Communications Director Craig Crawford told us, and the research was done by a former Senate staffer who could not be reached by press time. (Webb left the Senate in 2013.) We will update the fact check with new sources if they are made available.

Indeed, Webb has made the comparison for chief executives and average workers in the United States in the past. PolitiFact Virginia fact-checked a similar statement in September 2014, and Webb provided the AFL-CIO’s calculations as source.

The AFL-CIO figure, which Webb uses, has been widely cited. In 2013, chief executives made 331 times more than average workers, according to the labor union. The calculation uses chief executive pay from 350 available companies in the S&P 500 Index. The total compensation counted for the executive includes the salary, bonus and all other compensation (including stock and option awards and deferred compensation). The worker pay is from the 2013 Bureau of Labor Statistics earnings data, which calculate regular payments for straight-time hourly or salaried work, including incentive pay, bonuses, cost-of-living allowances, deferred income due to salary reduction plan, and deadhead pay.

There is no single reliable source to compare the U.S. ratio to other countries, or even to accurately measure the U.S. ratio. But The Fact Checker could not confirm Webb’s claim that Japanese chief executives make 10 times, and German chief executives make 11 times, than average workers. There was a 2010 BusinessWeek report using data from 300 people at Japan’s 3,813 public companies, which showed chief executives earned 16 times more than typical workers. A 2011 Daily Kos article with a single chart with no attribution shows Japan’s ratio at 11-to-1 and Germany’s at 12-to-1. It also claims the U.S. ratio is 475-to-1. (PolitiFact rated this claim False.)

The most widely used global comparison is the AFL-CIO’s 2012 report using data from the Organisation for Economic Cooperation and Development (OECD). Several experts and representatives from salary research firms pointed us to this data. In 2012, the most recent figures available, the U.S. ratio was 354-to-1. In comparison, the ratio of the average chief executive compensation in Germany to the average worker compensation was 147-to-1. In Japan, it was 67-to-1.

Crawford told The Fact Checker that the point of Webb’s statement was to show “simply that our executive salaries are in a league of their own and hard to justify.” The point holds that there is a huge difference between U.S. and Japan/German executives, according to Crawford.

Comparing the United States and Germany to Japan is misleading. Japan traditionally and culturally has had low executive salaries, though there are wide divergences in their salaries, according to The Economist.

Corporate structure is unique to each country. Experts said U.S. companies tend to have a more “shareholder view” for executives’ duties, and much of their performance measures is tied to the expectation that the value of company’s publicly traded shares will increase. Executives in other countries tend driven by a “stakeholder view,” where maintaining a stable workforce is valued, they said. But these differences are now changing, and some companies in countries like Germany and Japan are beginning to adopt a U.S.-like corporate structure. That means the gap between the ratios in those countries and the United States could decrease in the coming years.

Pedro Matos, a University of Virginia Darden School of Business finance professor who studies international corporate governance structures, is critical of comparing the ratios between countries. While the numbers in his 2009 study are now outdated, the research notes interesting factors that could skew the comparison. He found U.S. executives are much more likely to receive incentive pay and equity-based pay than executives in other countries. When those factors were controlled, the U.S. executives’ base salary pay was comparable to counterparts in other countries.

Matos added that the same trend would apply in other fields: “If you’re going to do the same for top lawyers, or for athletes, or top entertainers, pretty much any top talent in a profession you can think of, that would be true. That ratio is much higher in the U.S. than in other countries.”

There is a point of consensus between countries, however. Global perception of the gap between average worker and chief executive pay is much narrower than reality, according to a study by Harvard Business School professor Michael Norton.

The Pinocchio Test

Webb’s larger point that the ratio of chief executives’ pay to average workers’ pay has increased since 1968 is correct, and so does his comparison that the U.S. ratio is higher than other countries’. But the figures he uses for Japan and Germany are suspiciously low, and we have not found any reliable source that reported those figures.

The most recent figure that is widely used by academics and researchers is the calculation by AFL-CIO. Those numbers are much higher than Webb claimed, at 67-to-1 in Japan and 147-to-1 in Germany. There are many ways to calculate this ratio, but the responsible thing to do would be to cite that one with caveats, rather than the alarmingly low figures Webb used in his speech. We wavered between Two and Three Pinocchios.

But the comparisons between countries are misleading. There are so many cultural and traditional differences between corporate structures that have nothing to do with income inequality in the United States. That, and the stark difference between Webb’s version of Japan and Germany statistics and the generally accepted numbers, tipped the rating to Three.

Three Pinocchios

 


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