Excessive CEO Pay vs. Overcompensated Public Employees
by Richard Rider, Chairman, San Diego Tax Fighters
4 February, 2011
Phone: 858-530-3027
Whenever there is a discussion of the overcompensation of government employees, the public labor union defenders go to their playbook for retorts. Each response is based on a grain of truth – or rather a grain of half-truth. Let’s take one of my favorites.
“Public servant pay and pension abuses are trivial compared to the millions of excessive pay and benefits for big business CEO’s. THAT is where public outrage should be focused.”
This “excessive CEO pay” is a widely accepted concept. We KNOW it is true because, well, CEO’s make one heck of a lot more that we do. Clearly, the union apologists want to deflect the public’s growing anger against government unions and redirect it at evil business CEO’s.
Though tempting, I’ll not here try to defend this supposed CEO excess. Let’s go with it. Let’s consider the magnitude of this perceived CEO problem.
According to a recent study by a left wing anti-business think tank, in 2009 the average S&P 500 CEO received $8,419,411 total annual compensation (pay and benefits).
www.ips-dc.org/files/2433/EE-2010-web.pdf page 5
These are essentially the 500 biggest corporations in America. Let’s round that CEO figure up to $10 million.
If “we” (via government fiat) reduce CEO compensation 50%, that would save consumers $2.5 billion. That’s a lot of money!
Or is it?
Coincidentally, $2.5 billion is roughly the city of San Diego’s unfunded liability for its employee/retiree pension and health care plans. No, not the COST of city workers which, even disregarding the unfunded liability costs, is roughly 80% of the city’s general fund. $2.5 billion is just the SHORTFALL the city owes.
If this $2.5B is the shortfall cost of just one good-sized American city, what is the cost to taxpayers of the overcompensation (and unfunded liabilities) of ALL the federal, state, county, city and other government budgets? Think a trillion+ dollars.
Okay, but we consumers still don’t like overpaying for our goods and services. When we buy a product, how much of the cost of that product is for the overcompensation of the greedy CEO’s?
The total sales for the S&P 500 (the biggest 500 businesses) in 2009 was $7.99 TRILLION. That figure is considerably higher in the 2010 recovery, but such numbers are not yet available.
https://www.sp-indexdata.com/idpfiles/indexalert/prc/active/pressreleases/2009%20500%20fgn%20sales%20v2.pdf
So, of that low 2009 $7.99 trillion figure, what percent is $2.5 billion – our presumed excessive CEO compensation?
0.03%.
That’s THREE ONE HUNDREDTH OF ONE PERCENT cost to their customers. If we instead cut CEO pay 100% (workers’ paradise model), we’d save just 0.06%.
Sure, I don’t want to pay even a little extra for my goods. I always want lower prices.
But how big a deal is 0.03% compared to just the sales tax alone? In most of San Diego County, the sales tax is 8.75%. Hence our sales tax is over 291.7 times higher than the “overcompensation” cost for the CEO’s.
And that’s just the sales tax. Throw in all the other taxes that a corporation pays for their operation — sales, property, fuel, payroll, etc. Those are costs that — like the cost of the CEO — are passed through to the customers — and are at least 100 times larger than the $5 million supposed overpayment of the CEO.
And then there’s the corporate income tax on the profits. For most S&P corporations (the ones making money), they pay between 25% and 40% of their profits away to the federal and state governments.
Do the corporations “pay” the tax? Not often. Mostly they tack on the cost of such taxes to the price of goods the consumer buys. Assuming a 30% average corporate income tax on profits averaging 7% of sales for the S&P 500, in 2009 that’s $167.79 billion in corporate income taxes that are largely passed through to consumers. ($7.99 trillion x 7% profit x 30% tax)
Bottom line? While excessive corporate CEO pay naturally galls the envious, it is a trivial issue in the cost to taxpayers and consumers. Go to where the money (and savings are) – government employee excessive compensation – and the huge pass-though cost of these abuses to all Americans.
Comments 8
This is a very interesting article. I like your measure for the added cost of CEO compensation to the total in sales, which makes evident what I think we all know – that CEOs are more of a target for public outrage than a source of true cost control.
However, I don’t think the driving force between the public anger is “envy,” as you suggest near the end (“…naturally galls the envious”). Envy is a constant, but the escalated pitch and tenor of the public voice during this crisis is based on a lack of shared suffering. Similar to the anger at public employees, the general public doesn’t like to see some folks maintaining their quality of life or profiting (especially to the tune of $8-10 million), while they are badly suffering and losing their jobs.
As much as we are individuals, we are also an American family and we should stick together when the going gets tough.
One question I’d have is how to come up with a similar metric to private sector “sales” for public employees, given that they dont make a typical “product.” Just a discussion point.
Author
Actually Jason, as a percent of pay, the S&P 500 CEO’s took a bigger percent drop in this downturn in pay than most employees.
“After a 15% collective pay cut in 2007, chief executives of the 500 biggest companies in the U.S. (as measured by a composite ranking of sales, profits, assets and market value) took another reduction in total compensation, 11%, for 2008.”
http://www.forbes.com/2009/04/22/executive-pay-ceo-leadership-compensation-best-boss-09-ceo_land.html
Did they “suffer enough”? Well, now we are back to the envy problem. For some that were hurt in the recession, whatever the reduction of CEO pay is, it’s never “enough.”
Let’s assume that some progressive company (say, the liberal Progressive Insurance company) decides to pay their CEO 90% less “to be fair.” What are the chances they will retain the CEO (assuming that CEO is doing a good job)? And with the CEO’s departure, what quality of CEO will apply for this much lower paying job?
Richard,
Sound like the same argument being made by the Police Officers Association. Just saying.
Author
The issue, Alger, ultimately is supply and demand. While police can make something of a case for their level of compensation based on this criteria, such is not the case for firefighters and most other government employees.
How many workers are leaving (not counting retirees), and how hard is it to find replacements? If governments started actively advertising the advantages of government employment, they would be SWAMPED with applicants for most job openings.
Moreover, most (not all) government employees — including police — are all but impossible to fire for incompetence, or even for mediocre performance. Such is not the case for CEO’s, who like baseball managers and NFL coaches, they know they are under constant “do or die” scrutiny.
Richard,
Notice that I only mentioned Police, not other public employees.
Also, please note that when a CEO gets fired, and it happens less often than you think, he/she usually walks away with a very generous severance package.
Richard,
The hard to fire argument is wrong when it comes to Cops. LA City Schools have fired 1 teacher in the last ten years. Law Enforcement routinely pink slips employees. Some are let go on probation while others are either fired or tender a resignation letter before they get fired. Anyone in the know in law enforcement knows the race to quit before getting fired is a big one as they don’t want getting fired on their resume. Just because you belief in something does not make it true.
Hank Turner
Deputy Sheriffs’ Association
Author
Hank, your post is of interest. I may indeed be incorrect on police firings, or at least deputies.
Is there some source on how may deputies (a percentage is what is needed) get fired who have at least, say, 4 years on the job? Obviously we don’t want to count the probationary cops, any more than we count the non-tenured teachers when looking at teacher dismissals.
I’m not being my usual combative self here — I’m honestly looking for objective sources one way or the other.
Richard,
I don’t know if they track the numbers of people fired. I started in 1992 with 38 people. 1 didn’t finish the Academy while 2 others did not finish the academy. Nineteen years later 10 of us are left. I know at least five of them left because they were fired or quit before they were fired. Government, just like the private sector, is afraid to release information on who is terminated because of state privacy laws. I will look into and see what I can find out numbers wise. For the record, I didn’t know you were considered comabative Richard.
Hank Turner – DSASD