Juxtaposition of CEO and Worker Compensation

Is Executive Compensation Excessive?

The scrutiny of executive compensation has increased with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In particular shareholders can vote on executive compensation packages. While such a vote is non-binding it can result in considerable negative publicity for a corporation and could lead to shareholder lawsuits as has been the case for Citigroup. The Resource Tepee (US patent 7,495,673 B1) can be useful as a tool to assess if executive compensation is excessive. A juxtaposition of CEO compensation with those across all employees at each of the other band levels (or within functions at chosen band levels) in an organization through this visualization may be helpful. We return to the simulated corporation in our first example and look at compensation spread across functions and levels. This simulation of compensation assumes a 350 fold increment of CEO compensation over that of the average worker in the lowest band of the corporation. Professor G William Domhoff in his website on wealth, income and power in America cites an average 344 fold increment in CEO compensation over that of an average worker in 2007. Compensation in multiples of 30, 11, 6, 4, 2.5 and 1.5 of the base worker are assumed as we go down the band levels. The Bureau of Labor Statistics reports a wages of $13.36 and $15.31 per hour in 2008 for two occupations at the lower end of the pharmaceutical and medicine industry’s occupation categories. This simulation uses a compensation of $15.00 per hour at the lowest band. This average income drop-off is depicted in the following graphic.

 

The wine glass shaped graphic above depicts a likely drop-off in average compensation as we go down the salary grades in an organization. However we do expect the leaders of our industry to be reasonably well paid as their skills and talents can generate a lot of shareholder and employee wealth and they can make important contributions to our society. So it is also fair to see an executive’s compensation in the context of aggregate compensation across different levels and functions of the organization he heads. The resulting aggregate compensation matrix (in 1000s of dollars) for the distribution of personnel as in our first example is in the following.

Grade Logistics Finance R&D Marketing Administrative IT Manufacturing Engg/Maint Row Sum
CEO 0 0 0 10920 0 0 0 0 10920
CEO-1 0 1872 1872 936 936 0 1872 0 7488
CEO-2 0 3432 3432 1373 686 1030 1030 343 11326
CEO-3 187 7488 7862 1872 1123 3744 1498 374 24148
CEO-4 499 22464 20966 5491 1498 13229 4118 749 69014
CEO-5 1404 59904 70044 24648 3354 28938 10920 1638 200850
CEO-6 4072 0 87984 29203 10436 0 24710 5008 161413
CEO-7 12168 0 0 0 22246 0 55723 11326 101463
Column Sum 18330 95160 192160 74443 40279 46941 99871 19438 586622

Tepee looking at Compensation over an Entire Organization

The tepee below is a visualization of the distribution of compensation. What constitutes excessive compensation is difficult to address. One may needs a panel of sociologists, shareholder representatives, economists and other involved coalitions to address compensation.  Graphics can be an aid in making these decisions. One could get some insights on compensation by laying this tepee next to a tepee done for the distribution of personnel as well as looking at the wine glass shaped average income drop-off down the hierarchy of an organization.

Please click on the graphic to see it in better resolution.