(Michael B. Thomas/AFP/Getty Images)

“There’s something wrong when CEOs make 300 times more than the American worker.”

— Hillary Rodham Clinton, roundtable in Monticello, Iowa, April 14, 2015

This is a common talking point among Democrats — that corporate chief executives make 300 times more in pay than the average worker. In fact, it’s been repeated so often that some might believe it hardly seems worth fact checking.

But it is important to understand how this figure is derived – and what it really means. It is not quite as cut and dried as Clinton suggested.

The Facts

The Clinton campaign said she was relying on a study by the Economic Policy Institute, a left-leaning think tank, which found that at the top 350 U.S. firms, in terms of sales, average chief executive compensation in 2013 was $15.2 million. It concluded that this was 295.9 times higher than the average compensation of workers at those companies, which was a decline from a peak of 383.4-to-1 in 2000 but far higher than a 20-to-1 ratio in 1965.

So how does the organization come up with this ratio?

EPI has published a fairly detailed description of its methodology. For chief executives, it originally used an annual survey published by the Wall Street Journal, and then later switched to buying the information –at a cost of $10,000 a year, according EPI president Lawrence Mishel—from Compustat, a division of Standard & Poor’s. The database includes data on the compensation of the companies in the S&P 1500 Index dating back to 1992, but Mishel says they focus on the top 350 in order to remain consistent with the WSJ data going back to the 1960s.

The compensation measured includes such items as salary, bonuses, restricted stock grants, options exercised and long-term incentive payouts.

For the workers, the compensation calculation is even more complicated. The researchers looked at Bureau of Labor Statistics data for the hourly wages of production and nonsupervisory workers in the industries covered by the companies in the chief executive database. (Generally, these workers represent about 80 percent of payroll employment.) This turned to be about 20 percent higher than median hourly wage.

To determine annual compensation, including health benefits and like, EPI used a compensation-to-wage ratio from Labor’s Bureau of Economic Analysis, and multiplied the data by 2,080 (52 weeks x 40 hours.)  The result was a calculation that the annual compensation for typical workers in these firms was $55,800, which is likely an overstatement because not all workers work full-time.

The ratio itself is reached by averaging the specific firm ratios, not simply dividing the average of chief executive pay by worker pay.

Mishel says he was trying to be conservative, but it is worth noting that the Wall Street Journal survey for 2013 says the median pay for chief executives at the 300 largest companies was $11.4 million, not EPI’s $15.2 million. Mishel says he does not know why the WSJ calculation is 25 percent lower.

Using the WSJ’s figure for chief executive pay would bring the ratio down to about 200 to 1.

Indeed, Bloomberg last year did its own calculation of the top 250 companies and came up with a ratio of 204 to 1, which it says is an increase of 20 percent since 2009. (EPI’s figures shows a 50 percent increase since 2009.) Bloomberg breaks down the data by individual companies. J.C. Penney, the company with the worst ratio, showed 1,795 to 1. But the companies at the bottom of the list has ratios of about 173 to 1.

Payscale.com has its own calculation of cash compensation for the Fortune 100, which shows an even wider range, with almost 40 firms having a ratio below 100.

This brings us to Clinton’s statement. The most powerful part of EPI’s research is the change in the ratio over time, as stock options and other incentives have resulted in big increases in chief executive pay. Clinton simply stated “CEOs make 300 times more than the American worker.”  But most chief executives do not work at large companies.

The Bureau of Labor Statistics says there are more than 246,000 chief executives in the United States, with a median annual wage of $173,320. Looking just at chief executives of “management of companies and enterprises” yields an annual median wage of just over $216,000. These figures do not include benefits, but on an hourly basis it’s about five or six times more than the pay of a typical worker before benefits.

Data published by the Statistic Brain Web site, using information from Forbes and other organizations, also shows that more than 50 percent of chief executives have an annual salary of less than $250,000 and nearly 80 percent make less than $500,000. Just 2 percent have annual salaries that top $3 million. (These figures do not appear to include stock options.)

Now, of course, the earnings by executives at the biggest firms certainly influence pay trends at smaller companies, as well as pay for university presidents, nonprofit executives and so forth. But the story is much more complicated once you get past the companies with the biggest revenue.

The Dodd-Frank law passed five years ago required publicly traded companies to begin to disclose the pay ratio between their chief executives and workers but the Securities and Exchange Commission has struggled to write the regulation in part because there are so many complicated variables to consider. If the rule is ever issued, then the data set possibly could be even richer.

Finally, we should note that a disparity in pay between very top in a field and other workers is not necessarily unusual. For instance, the average salary for the top 100 Major League Baseball players is $16.4 million, compared to $4 million for the average for all MLB players and about $40,000 for professional minor league baseball players who earn a spot on a 40-man roster. Most minor-league players earn between $3,000 and $7,000 in a season, according to a lawsuit filed against Major League Baseball that said minor-leaguers earned less than fast-food workers on the minimum wage.

The Pinocchio Test

Clinton appeared to be speaking extemporaneously, though a video of the event indicates she was also looking at notes. But she should have been clearer that she was discussing the pay ratio of top corporate chief executives, not all CEOs.

The EPI study she relied on is most compelling in showing the trend in compensation over time, since it relies on a similar data set dating back to the 1960s. In a given year, the gap may not be as stark as 300-to-1 if you are looking at other studies or individual companies.

(Update: The Wall Street Journal notes that Clinton had earlier said “the average CEO makes about 300 times what the average worker makes.” If we had been aware of that statement, it would earned many more Pinocchios. As shown, that’s completely wrong.)

One Pinocchio

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